Localized knowledge spillovers and wage differences

In this paper, we investigate at the broader, aggregate level, knowledge spillovers increase the supply of information, which raises the productivity of knowledge intensive activities vis-à-vis less knowledge-intensive ones. Moreover, because knowledge intensive activities require absorptive capacity, the benefits of knowledge spillovers fall mainly on skilled rather than unskilled individuals. One implication of an increasing level of localized knowledge spillovers is therefore a wider inequality of wages across skills.