Wage Trickle Down vs. Rent Trickle Down: How Does the Increase in College Graduates Affect Wages and Rents?

Abstract

This study examines how the changing composition of adult educational attainment in cities affects the distribution of wages and rents in those cities. We extend the Rosen-Roback spatial equilibrium model to show that as the share of college graduates increases, the impact of this change on the overall welfare of skilled and unskilled workers varies, particularly when individuals have different locational preferences and as housing supply takes time to adjust to changing demand. Using the PSID from 1980 to 2013, we find that college graduates gain higher wage premiums in cities where the share of college graduates are increasing. On the other hand, those without college education do not experience the same wage benefit, and some even experience wage losses. These results hold even after controlling for unobserved characteristics of individuals and cities. Rental prices also increase in cities that experience growth in the share of college graduates. On average, the increase in rental costs offsets the earning increases, and thus the residual earnings do not change in cities with greater influxes of high skilled workers. However, the gains and losses differ across individuals with different levels of education. For college graduates, we find that the increase in earnings benefits is greater than the increase in rental cost in cities with growing shares of college graduates. For those without college degrees, rental cost increases outweigh the increase in earnings in these cities. This suggests that less skilled workers can become worse off in cities that attract college graduates, especially in the short run.

Keywords: Wage, Rent, Human Capital Externality, Welfare Distribution

JEL Classification: D31, J23, J24, J31, R21, R23, R31