Spatial spillovers and the productivity-compensation gap
Explainer of Shakya et al. (2022), The Annals of Regional Science. Not the journal article.
Citation: Shakya, S., Plemmons, A., & Sayago-Gomez, J. T. (2022). Spatial spillovers and the productivity-compensation gap in the United States. The Annals of Regional Science. Free PDF
Facts¶
Main finding¶
Accounting for productivity spillovers across state boundaries significantly narrows the productivity-compensation gap, suggesting regional spillovers explain meaningful portions of wage stagnation.
One caveat¶
State-level geographic unit may be too broad to capture important metro-level or local spillovers within state boundaries.
Policy hook¶
The U.S. productivity-compensation gap has puzzled economists since the 1970s. Do productivity gains fail to translate to wages because spillovers to neighboring regions mean workers capture only partial benefits?
Data and setting¶
State-level industry panel data for 66 industries across 48 continental U.S. states, 1998-2017, including employment, compensation, and gross industrial output.
Research design (plain language)¶
Spatial econometric techniques including spatial two-stage least squares instrumental variables and spatially lagged X framework model how productivity in one state affects neighboring state compensation.
PDF or DOI¶
Why it matters¶
The productivity-compensation gap is a major inequality story: workers produce more value but don’t earn more. One explanation is that productivity gains flow to capital, not labor - but another is that they flow to other regions. This paper’s finding that regional spillovers explain part of the gap shifts the lens: wage stagnation may reflect global trade and supply-chain integration as much as corporate power. For labor advocates, the finding implies that local wage policy ignores regional dynamics - a worker in Ohio may lose wages because productivity gains spilled into Indiana. For economists, it highlights the importance of accounting for geographic mutual dependence in wage models. For policy, it suggests that regional wage coordination or redistribution mechanisms might be needed to ensure that productivity gains in spillover regions benefit the source region’s workers. The state-level focus also leaves open the possibility that metro-area and local spillovers are even more important.