Identifying Human-Capital Externalities: Theory with Applications

Authors: Antonio Ciccone and Giovanni Peri

Review of Economic Studies, Vol. 73, No 2, 381--412, January, 2006

The identification of aggregate human-capital externalities is still not fully understood. The existing (Mincerian) approach confounds positive externalities with wage changes due to a downward sloping demand curve for human capital. As a result, the Mincerian approach yields positive externalities even when wages equal marginal social products.We propose an approach that identifies human-capital externalities, whether or not aggregate demand for human capital slopes downward. Another advantage of our approach is that it does not require estimates of the individual return to human capital. Applications to U.S. cities and states between 1970 and 1990 yield no evidence of significant average-schooling externalities.

This paper originally appeared as Barcelona GSE Working Paper 6