Wage Effects from Changes in Local Human Capital in Britain

This paper examines the wage effects arising from changing local human capital in the labour market areas of Britain. Employing wage regressions, it is found that individuals' wages are positively associated with changes in the employment shares of high-paid occupation workers in the British travel-to-work-areas for the late 1990s. I examine this positive association for different occupational groups (defined by pay) in order to disentangle between production function and consumer demand driven theoretical justifications. The former refer to production complementarities or wider productivity spillovers arising in areas with high shares of high-skill workers. According to the latter, the presence of a high income workforce in the economy boosts the demand for consumer services leading to an increase in low-pay, service related employment. As these services are non-traded, the increased demand for local low-paid services should be reflected in a wage premium for the relevant low-paid occupation employees in the areas with larger shares of high-paid workers. The wage impact is found to be stronger and significant for the bottom occupational quintile compared to the middle-occupational quintiles and using also sectoral controls the paper argues to provide some preliminary evidence for the existence of consumer demand effects. The empirical investigation addresses potential sources of biases controlling for time invariant unobserved area-specific characteristics and unobserved individual characteristics. Nevertheless, the paper points to a number of caveats of the analysis that warrant future research.