... Obviously we can't fly out and look down on it, so what observations are made to deduce the structure of the galaxy?
But that is circular reasoning. A very basic understanding of observational astronomy would explain why we didn't understand the similarities of our galaxy and the various "nebulae" until around 100 years ago. With better telescopes and imaging tools, it became easier to categorize galaxies into ellipticals, "early" and "late" spirals (very deceptive labeling), etc. Once astronomers recognized that most of the "nebulae" were galaxies, it wasn't much of a stretch to start characterizing the galaxy that we live in. The "aha" moment had nothing to do with active star-formation in spiral arms.It's not exactly my area but I think star formation being concentrated in the arms is still the orthodox model?
A quick arvix search suggests lots of recent papers and an IAU conference on it.