DP3350 Identifying Human Capital Externalities: Theory with an Application to US Cities

Author(s): Antonio Ciccone , Giovanni Peri

Publication Date: April 2002

Keyword(s): marginal social product of human capital , wages , human capital externalities , imperfect substitution , perfect substitution , cities

JEL(s): J30 , O40

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP3350.asp

Identification of the strength of human capital externalities at the aggregate level is still not fully understood. The existing method may yield positive or negative externalities even if wages reflect marginal social products. We propose an approach that yields positive average human capital externalities if and only if the marginal social product of workers with above-average human capital exceeds their wage. As an application, we estimate the strength of average-schooling externalities in US cities between 1970 and 1990.