Internet and Local Wages, The: A Puzzle

Article Source: American Economic Review, Vol. 102, No. 1, 2012
Publication Date:
Time to Read: 1 minute read
Written By:

 Avi Goldfarb

Avi Goldfarb

 Chris Forman

Chris Forman



This paper examines why Internet-related investment increased wages in only some US counties.


Policy Relevance:

Subsidizing telecommunications and internet infrastructure in sparsely-populated areas is unlikely to result in wage growth.


Key Takeaways:
  • In the 1990s advancements in telecommunications and Internet technology lowered the cost of operating a firm in geographically-isolated areas.

    • Firms producing, and investing in, these technologies grew rapidly.
    • But, was there a relationship between Internet adoption and growth in a region?
  • The authors examine data on wages, Internet industry concentration, population density, and education at the county level in the United States between 1995 and 2000.

    • Increases in wages were related to Internet adoption only in the most-populated, richest, most-educated counties.
    • These well-off counties averaged 28% wage growth; other counties experienced only 20% wage growth, and the Internet explains half of the difference.
    • Four factors were necessary, simultaneously, for Internet-related wage growth: county population over 150,000, high education, high income, and preexisting technology and telecommunications firm presence.
  • It remains an economic puzzle why investment in Internet-related technology was widely dispersed while wages increased only in a small fraction of geographical areas. Economic theory might predict that wages would rise everywhere that concentrations of capital investment, like Internet access, increased.



Shane Greenstein

About Shane Greenstein

Shane Greenstein is the Martin Marshall Professor of Business Administration and co-chair of the HBS Digital Initiative. He teaches in the Technology, Operations and Management Unit. His areas of interest include: digital economy, information technology, networks, and technological innovation. Professor Greenstein is also co-director of the program on the economics of digitization at The National Bureau of Economic Research.