DP2599 Human Capital and Externalities in Cities

Author(s): Antonio Ciccone, Giovanni Peri
Publication Date: November 2000
Keyword(s): Aggregate Return To Human Capital, Cities, Decreasing Returns To Human Capital, Human Capital Externalities, Imperfect Substitution, Perfect Substitution, Scale Externalities
JEL(s): J30, O0, O40, R0
Programme Areas: International Macroeconomics, Labour Economics, Public Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2599

We combine growth theory with US Census data on individual schooling and wages to estimate the aggregate return to human capital and human capital externalities in cities. Our estimates imply that a one year increase in average schooling in cities increases their aggregate labour productivity by 8 to 11%. We find no evidence for aggregate human capital externalities in cities however, although we use three different approaches. Our main theoretical contribution is to show how human capital externalities can be identified (non-parametrically) even if workers with different levels of human capital are imperfect substitutes in production.