DP2599 Human Capital and Externalities in Cities

Author(s): Antonio Ciccone , Giovanni Peri

Publication Date: November 2000

Keyword(s): Aggregate Return To Human Capital , Human Capital Externalities , Decreasing Returns To Human Capital , Imperfect Substitution , Perfect Substitution , Scale Externalities , Cities

JEL(s): J30 , O0 , O40 , R0

Programme Areas: International Macroeconomics , Labour Economics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP2599.asp

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.