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Human Capital Externalities in Western Germany

  • Daniel F. Heuermann


    (Institute for Labour Law and Industrial Relations in the EC, University of Trier)

The paper sheds light on the impact of spatial agglomeration of human capital on individual wages in Western Germany. Using panel data it shows that regional wage differentials are to a large extent attributable to localized human capital externalities arising from the regional share of highly qualified workers. Employing the regional number of public schools and of students as instrumental variables the paper shows that human capital externalities are underestimated in ordinary panel regressions for wages of highly qualified and non-highly qualified workers alike due to supply shifts of highly qualified workers. An analysis by sector reveals that human capital externalities are more pronounced in manufacturing than in the service sector. We find indication that highly qualified workers benefit from intra-industry knowledge spillovers, while non-highly qualified workers profit from pecuniary externalities between industries. Our findings are stable among a variety of indicators of regional human capital and robust to the inclusion of other sources of increasing returns, as well as wage curve, price level, and amenity effects.

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Paper provided by Institute of Labour Law and Industrial Relations in the European Union (IAAEU) in its series IAAEG Discussion Papers until 2011 with number 200903.

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Length: 34 pages
Date of creation: Apr 2009
Date of revision:
Publication status: Published in Spatial Economic Analysis, Taylor and Francis Journals, vol. 6(2), pages 139-165
Handle: RePEc:iaa:wpaper:200903
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