published in: Review of Economic Studies, 73 (2), 2006, 381-412
Identification of the strength of human capital externalities at the aggregate level is still not
fully understood. The existing method may yield positive or negative externalities even if
wages reflect marginal social products. We propose an approach that yields positive average
human capital externalities if and only if the marginal social product of workers with aboveaverage
human capital exceeds their wage. As an application, we estimate the strength of
average-schooling externalities in US cities between 1970 and 1990.
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