Industry localization and earnings inequality

"While the productivity gains associated with the geographic concentration of industry (i.e. localization) are by now well-documented, little work has considered how those gains are distributed across individual workers. This paper offers evidence on the connection between total employment and the relative wage earnings of high- and low-skill workers (i.e. inequality) within two-digit manufacturing industries across the states and a collection of metropolitan areas in the U.S. between 1970 and 1990. Using two different measures--90-10 percentile gaps in both overall and residual wages--I find that wage dispersion falls substantially as industry employment expands. Results from a simple decomposition of this relationship into average plant-size and plant-count components indicate overwhelmingly that average plant size is the primary driving mechanism. Although not necessarily inconsistent with theories appealing to intermediate inputs or technological spillovers, such findings are particularly supportive of Marshall's (1920) labor market pooling explanation for localization"--Federal Reserve Bank of St. Louis web site.