Human Capital Externalities or Consumption Spillovers? The Effect of High-Skill Human Capital across Low-Skill Labor Markets

Abstract

Previous studies often interpret the positive impact of high-skill human capital on the mean wages of low-skill workers as evidence of human capital externalities. We uncover a distributional wage effect that is difficult to reconcile with standard models of human capital externalities: city-level share of college graduates has a positive impact on wages of low-skill workers at the lower quantiles of the wage distribution, but not the upper quantiles. We then provide a comprehensive assessment and discussion of the effect of high-skill human capital on wages of low-skill workers in different occupations. We find a large and positive effect in the service sector but not in the manufacturing sector. These findings invite reinterpretation of previous studies on human capital externalities in low-skill labor markets, as the positive effect in the service sector is more likely to be explained by consumption spillovers generated by college-educated workers.

Keywords: Human Capital Externalities, Consumption Spillovers, Wages, Service Occupations

JEL Classification: R10, R23, R31, J24, J31, I26