Localized Knowledge Spillovers and Skill-Biased Performance

This article focuses on a relatively unappreciated consequence of localized knowledge spillovers: their implications for productivity across skills. Spillovers benefit skilled workers more than unskilled ones, weaken complementarity between them, and widen their productivity gap. To test this theory, the authors use data from 146 U.S. cities and find that cities with a greater intensity of localized knowledge spillovers exhibit a bigger productivity gap across skills, after controlling for the endogeneity of knowledge spillovers, interindustry differences, and other factors. These results imply that in the long run, economies characterized by localized knowledge spillovers encourage investments in education and attract skilled people, raising the relative share of the skilled population. When complementarity across skills weakens, this analysis also offers a framework to link localized knowledge spillovers to the formation of entrepreneurial skill-intensive firms.