Human Capital Spillovers in Manufacturing: Evidence from Plant-Level Production Functions

I assess the magnitude of human capital spillovers in US cities by estimating plant level production functions. I use a unique firm-worker matched dataset, obtained by combining the Census of Manufacturers with the Census of Population. After controlling for a plant’s own human capital, plant fixed effects, industry-specific and state-specific transitory shocks, I find that the output of plants located in cities that experience large increases in the share of college graduates rises more than the output of similar plants located in cities that experience small increases in the share of college graduates. Several specification tests indicate that the estimated effect is not completely spurious. First, within a city, the spillover between plants that are geographically and economically close is positive, while spillovers between plants that are geographically close but economically distant is zero. Second, most of the estimated spillover comes from hi-tech plants. For non hi-tech productions, the spillover is virtually zero. When I stratify the sample by the percentage of employees who are college educated, I find that the spillover is larger the larger the percentage of college educated workers in the plant. Third, density of physical capital in a city outside a plant has no effect on a plant’s productivity. Consistent with a model that includes both standard and general equilibrium forces and spillovers, the estimated productivity differences between cities with high and low levels of human capital match remarkably well differences in labor costs that are typically observed between cities with high and low levels of human capital. This is important because, in equilibrium, any productivity gain generated by human capital spillover should be offset by increased costs.