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Human capital externalities or consumption spillovers? The effect of high-skill human capital across low-skill labor markets

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  • Liu, Shimeng
  • Yang, Xi

Abstract

Previous studies often interpret the positive impact of high-skill human capital on the mean wages of low-skill workers as evidence of human capital externalities. Using a grouped IV quantile technique, we uncover a distributional wage effect of high-skill human capital that is difficult to reconcile with the standard models of human capital externalities: the city-level share of college graduates has a positive impact on the wages of low-skill workers at the lower, but not the upper, quantiles of the wage distribution. We then provide a comprehensive assessment and discussion of the effect of high-skill human capital on low-skill wages in different occupations. We find a large and positive wage effect in the service occupations but not in the manufacturing occupations. We argue that consumption spillover, instead of human capital externality, is the underlying mechanism. These findings invite reinterpretation of previous studies on human capital externalities in low-skill labor markets.

Suggested Citation

  • Liu, Shimeng & Yang, Xi, 2021. "Human capital externalities or consumption spillovers? The effect of high-skill human capital across low-skill labor markets," Regional Science and Urban Economics, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:regeco:v:87:y:2021:i:c:s0166046220303057
    DOI: 10.1016/j.regsciurbeco.2020.103620
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    More about this item

    Keywords

    Human capital externalities; Consumption spillovers; Wages; Service occupation;
    All these keywords.

    JEL classification:

    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • I26 - Health, Education, and Welfare - - Education - - - Returns to Education

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