Human Capital Externalities and Proximity: Evidence from Repeated Cross-Sectional Data

Summary  Does schooling generate social returns in excess of the private returns captured by the individual who makes the human capital investment? As a strategy to detect human capital externalities I use Dutch survey data to estimate the impact of the average human capital stock in a region on individual wages, considering regional human capital as a local public good. Indeed, the regional fraction of high-skilled workers or the region’s average educational attainment appears with a positive and statistically significant coefficient in an augmented Mincer specification. However, the impact on individual wages completely vanishes when the firm’s human capital stock is included as an additional control. This may suggest that human capital externalities predominate within firms, though alternative explanations, in particular selection of high-skilled workers in high-productive companies and imperfect substitutability across skill groups, cannot be ruled out. I would like to thank two referees, Nicole Bosch, Theo van de Klundert, Pierre Koning, Rob Luginbuhl, Mauro Mastrogiacomo, Gabriela Schütz, Wouter Vermeulen, Dinand Webbink and seminar participants at the Enterprise and Industry Directorate-General of the European Commission, the NAKE Research Day 2007, the 64th Congress of the International Institute of Public Finance, and the CPB Netherlands Bureau for Economic Policy Analysis for helpful comments, and Joke Goes, Jelte Haagsma and Judith Hoeben for their help with the data. Views expressed are my own, and do not necessarily reflect official positions of the European Commission or the CPB Netherlands Bureau for Economic Policy Analysis.