Knowledge economy, internal migration, and local labour markets

The spatial concentration of knowledge-intensive activities can generate multiplicative effects at the local level. This paper investigates how employment growth in knowledge-intensive and tradable sectors affects wage, days worked, and internal migration among non-tradable workers in the local economy. We leverage matched employer-employee social security data for Italy (2005-2019), which enables us to track individual workers across jobs and locations. Our empirical strategy combines a two-step estimation procedure with a shift-share instrument, allowing us to separately identify the roles of worker sorting and local spillovers. We find that the expansion of knowledge-intensive sectors stimulates local employment (intensive margin) and increases the attractiveness of an area for non-tradable workers. A higher presence of workers in tradable and knowledge-intensive industries is also associated with higher nominal wages of non-tradable workers, but only when sorting is not accounted for, suggesting a selective inflow of more productive workers into knowledge hubs. At the same time, the expansion of the knowledge economy seems to drive up local living costs, resulting in a negative effect on real wages. These findings highlight the complex interplay between labour demand shocks, worker mobility, and spatial inequality in the context of the knowledge economy. • Knowledge clusters generate multiplicative effects at the local level. • Fixed-effects models allow to disentangle sorting from local spillovers. • Knowledge sector growth raises days worked and attracts non-tradable workers. • Knowledge hubs display increased sorting of high-earning and mobile individuals. • Living costs rise faster than nominal wages, leading to lower real wages.