The gold mine model of economic development: Labor sorting, wage gradients and housing prices

This dissertation considers the following questions: (1) How will standard urban models change if urban areas are anchored at exogenously determined locations by firms or clusters of firms that use a large specialized labor force to produce valuable tradable goods? (2) Can models based on exogenously located anchor firms be used to make predictions that are confirmed by analysis of U.S. data? Metaphorically, highly productive location-constrained firms are referred to as "gold mines".;The gold mine model explains phenomena observed in the real world that have not previously been demonstrated in a formal model. The initial effect of a large positive shock to a local firm's productivity may be jumps in housing prices and residential construction, long before the innovative firm's growth yields statistically significant increases in revenue from the production of tradable goods and services. The transmission mechanism to housing prices is through capital and residential construction, based on beliefs about future wages and employment levels.;The gold mine model explains why econometrically equivalent workers receive significantly different wages depending on where they live and work. Using data on eight states from the 2005 ACS-PUMS 1% sample, the hypothesis that annual labor income is independent of job location is rejected at a 99.9% confidence level, as is the hypothesis that annual labor income is independent of residence location.;With distributed employment and wage gradients, access to jobs is a significant determinant of housing prices. Since housing is a necessity, its income elasticity is expected to be less than one. Using 2005 ACS-PUMS data, the elasticity of housing expenditure with respect to current income ranges from 0.27 in Massachusetts to 0.49 in New York. The hypothesis that the income elasticity of housing expenditures equals one is rejected at the 99.9% confidence level in all eight states.