Estimating Aggregate Human Capital Externalities

This paper estimates two measures of human capital externalities. By incorporating externalities into an overlapping-generations model of human capital accumulation with Compulsory Schooling Laws (CSL), we show that human capital externalities can be estimated from the effects of CSL for one generation on wages of other generations. Using an instrumental-variable strategy deduced from the model, we find one more year of average schooling at the U.S. state level raises individual wages by 6-8%. Taking this reduced-form estimate into account, we find the elasticity of a typical firm’s productivity with respect to the average human capital of an economy is 0.121.