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Schooling Externalities, Technology and Productivity: Theory and Evidence from U.S. States

  • Susana Iranzo
  • Giovanni Peri

The recent literature on local schooling externalities in the U.S. is rather mixed: positive external effects of average education levels are hardly to be found but, in contrast, positive externalities from the share of college graduates can often be identified. This paper proposes a simple model to reconcile this mixed evidence. The key idea is that advanced technologies are complementary to highly educated workers, as opposed to traditional technologies which are complementary to less educated workers. Our calibrated model predicts that workers with high school education or less are employed in the traditional sector, while more educated workers are employed in the advanced sector. As the advanced sector is associated with the production of differentiated goods and services this generates a positive pecuniary externality (positive TFP effect) of college educated workers. By contrast, as no externalities are associated with the traditional technology, high school education only increases private returns. The model predictions are tested using data on U.S. states. We use compulsory attendance and child labor laws, push-driven immigration of highly educated workers and the location of Land Grant colleges as instruments for schooling attainments of workers in different states. The empirical estimates confirm that an increase in college education, but not an increase in high school education, had significant positive production externalities in U.S. states during the period 1960-2000.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12440.

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Date of creation: Aug 2006
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Publication status: published as Susana Iranzo & Giovanni Peri, 2009. "Schooling Externalities, Technology, and Productivity: Theory and Evidence from U.S. States," The Review of Economics and Statistics, MIT Press, vol. 91(2), pages 420-431, November.
Handle: RePEc:nbr:nberwo:12440
Note: ITI LS PR
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  1. de la Fuente, Angel & Doménech, Rafael, 2000. "Human Capital In Growth Regressions: How Much Difference Does Data Quality Make?," CEPR Discussion Papers 2466, C.E.P.R. Discussion Papers.
  2. Giovanni Peri & Gianmarco I.P. Ottaviano, 2005. "Rethinking the Gains from Immigration: Theory and Evidence from the U.S," Working Papers 58, University of California, Davis, Department of Economics.
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  9. Joshua D. Angrist, 1995. "The Economic Returns to Schooling in the West Bank and Gaza Strip," Working papers 95-5, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. George J. Borjas, 2003. "The Labor Demand Curve is Downward Sloping: Reexamining the Impact of Immigration on the Labor Market," NBER Working Papers 9755, National Bureau of Economic Research, Inc.
  11. Antonio Ciccone & Giovanni Peri, 2004. "Long-run substitutability between more and less educated workers: Evidence from U.S. States 1950-1990," Economics Working Papers 764, Department of Economics and Business, Universitat Pompeu Fabra.
  12. Ethan Lewis, 2003. "Local, open economies within the U.S.: how do industries respond to immigration?," Working Papers 04-1, Federal Reserve Bank of Philadelphia.
  13. David Card, 1993. "Using Geographic Variation in College Proximity to Estimate the Return to Schooling," NBER Working Papers 4483, National Bureau of Economic Research, Inc.
  14. Yeaple, Stephen Ross, 2005. "A simple model of firm heterogeneity, international trade, and wages," Journal of International Economics, Elsevier, vol. 65(1), pages 1-20, January.
  15. Acemoglu, Daron, 1997. "Why Do New Technologies Complement Skills? Directed Technical Change and Wage Inequality," CEPR Discussion Papers 1707, C.E.P.R. Discussion Papers.
  16. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  17. Janet Currie & Enrico Moretti, 2003. "Mother'S Education And The Intergenerational Transmission Of Human Capital: Evidence From College Openings," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1495-1532, November.
  18. Jonathan Temple, 1999. "The New Growth Evidence," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 112-156, March.
  19. Kevin Milligan & Enrico Moretti & Philip Oreopoulos, 2003. "Does Education Improve Citizenship? Evidence from the U.S. and the U.K," NBER Working Papers 9584, National Bureau of Economic Research, Inc.
  20. Peter J. Klenow & Mark Bils, 2000. "Does Schooling Cause Growth?," American Economic Review, American Economic Association, vol. 90(5), pages 1160-1183, December.
  21. Angel de la Fuente & Rafael Domenech, 2001. "Schooling Data, Technological Diffusion, and the Neoclassical Model," American Economic Review, American Economic Association, vol. 91(2), pages 323-327, May.
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