Productivity Gains From Geographic Concentration of human Capital: Evidence From the Cities

Based on recent theoretical developments I argue that the average level of human capital is a local public good. Cities with higher average levels of human capital should therefore have higher wages and higher land rents. After conditioning on the characteristics of individual workers and dwellings, this prediction is supported by data for Standard Metropolitan Statistical Areas (SMSAs) in the United States, where the SMSA average levels of formal education and work experience are used as proxies for the average level of human capital. I evaluate the alternative explanations of omitted SMSA variables and self-selection. I conclude by computing an estimate of the effect of an additional year of average education on total factor productivity.