Are there human capital externalities in U.S. states? Evidence from the Current Population Survey

This paper estimates human capital externalities across U.S. states, using the Current Population Survey (CPS) and state-level data. By directly controlling for individual job characteristics and state labor market conditions, we can identify the human capital externality in an augmented Mincerian model. We find that an extra year of state-level average schooling increases individual wages by five percent above and beyond the private return to education. Subsequent analysis finds that the estimated externality is larger in highly-educated, highly-innovative states. These results imply that the positive coefficient for state-level schooling is in fact an externality and that differences in human capital externalities can help explain “The Great Divergence†in wages between geographic areas with highly-skilled workers versus those with low-skilled workers.