Knowledge is transmitted more easily when industries operate, and workers work, in close physical proximity. The degree of similarity between two industries is measured in several ways, all of them based on the input-output flows across industries. Moves to more similar industries produce larger wage gains. This is especially true when the industries' similarity is based on their using many of the same inputs. This may be partly because the close proximity of industries, occupations, and individuals provides an environment in which ideas flow quickly from person to person.
Gains are more likely to accrue to industries as a result of labor mobility.
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