Identifying Human Capital Externality: Evidence from China

Identifying Human Capital Externality: Evidence from China

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Abstract:: Using data from two well-known individual surveys in China, we estimate human capital externality.We find a positive and statistically significant effect of city-level human capital on individual earnings.Fixed-effects estimates show a one-year increase in city average education could increase individual earnings between 7.3% and 8.9%.

Our IV estimate indicates a 7.6% increase.This finding confirms a long-held belief by economists that there are Canvas Picture external benefits of education that are not captured by the individuals who invested in human capital.By extension our finding also offers a Shattered Glass justification for an active role of the government in promoting education.We also find that the estimated effect of human capital externality is larger in coastal cities than in non-coastal cities and is larger in the non-state sector than in the state sector.

We ascribe these heterogeneities to differences in institutional and technological environments across cities and sectors.Keywords:: Human capital externality, Individual earnings, Chinese cities, JEL Codes:: I28, D62, D83.