How Large Are Human Capital Externalities? Evidence from Compulsory Schooling Laws

Many economists and policymakers believe that education creates positive externalities. Indeed, average schooling in US states is highly correlated with state wage levels, even after controlling for the direct effect of schooling on individual wages. We use variation in child labor laws and compulsory attendance laws over time and across states to investigate whether this relationship is causal. Our results show external returns to education around 1 percent and not significantly different from zero.