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Agglomeration and Human Capital

Author

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  • Chen, Yujiang River
  • Teulings, Coen

Abstract

The high return to human capital on GDP per capita, reaching up to 50% in simple cross country or region regressions, is puzzling. We develop a spatial model with both rural regions and cities. Both human capital and the concentration of employment in city centers drive knowledge spillovers. Regional land prices clear the market for inter-regional labor mobility, leading to joint predictions for the public return to human capital and land prices. We test the model using data on wages and real-estate prices for 47 U.S. rural areas and 34 CMSAs from 1979 to 2015. We find that the public return on wages is 30% of the private return in rural regions, rising to 150% in cities. The total (public + private) return to human capital on GDP per capita is 20%. Increased knowledge spillovers account for the full real wage growth and for most of the increase in house prices in this period. Regional sorting of human capital and the city form each account for 15% of GDP.

Suggested Citation

  • Chen, Yujiang River & Teulings, Coen, 2025. "Agglomeration and Human Capital," CEPR Discussion Papers 20201, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20201
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    File URL: https://cepr.org/publications/DP20201
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    Keywords

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    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • I26 - Health, Education, and Welfare - - Education - - - Returns to Education
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies

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