DP20201 Agglomeration and Human Capital
The high return to human capital on GDP per capita in cross-sections of countries or regions up to 50% is puzzling. We develop a spatial model where regions can be organized as either rural areas or monocentric cities. Both human capital and concentration of employment in city-centers stimulate knowledge spillovers. Regional land prices clear the market for interregional labour mobility, yielding joint predictions for the public return to human capital and land prices. We test the model using data on wages and real estate prices for 47 US rural areas and 34 CMSAs from 1979 until 2015. We find a public return on wages of 25% of the private return in rural areas and even 136% in cities. The return on GDP per capita is 20% and the increase in human capital accounts for all of the rise in GDP between 1979 and 2015.
