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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. Antonio Ciccone & Giovanni Peri, 2005. "Long-Run Substitutability Between More and Less Educated Workers: Evidence from U.S. States, 1950-1990," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 652-663, November.
  2. Antonio Ciccone & Giovanni Peri, 2006. "Identifying Human-Capital Externalities: Theory with Applications," Review of Economic Studies, Oxford University Press, vol. 73(2), pages 381-412.
  3. Gianmarco I.P. Ottaviano & Giovanni Peri, 2005. "Rethinking the Gains from Immigration: Theory and Evidence from the U.S," NBER Working Papers 11672, National Bureau of Economic Research, Inc.
  4. Angrist, Joshua D, 1995. "The Economic Returns to Schooling in the West Bank and Gaza Strip," American Economic Review, American Economic Association, vol. 85(5), pages 1065-87, December.
  5. Daron Acemoglu, 1998. "Why Do New Technologies Complement Skills? Directed Technical Change And Wage Inequality," The Quarterly Journal of Economics, MIT Press, vol. 113(4), pages 1055-1089, November.
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  8. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  9. Acemoglu, Daron, 2002. "Directed Technical Change," Review of Economic Studies, Wiley Blackwell, vol. 69(4), pages 781-809, October.
  10. 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.
  11. 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.
  12. Card, David, 2001. "Immigrant Inflows, Native Outflows, and the Local Labor Market Impacts of Higher Immigration," Journal of Labor Economics, University of Chicago Press, vol. 19(1), pages 22-64, January.
  13. 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.
  14. Acemoglu, Daron, 1996. "A Microfoundation for Social Increasing Returns in Human Capital Accumulation," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 779-804, August.
  15. 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.
  16. Francesco Caselli, 2005. "Accounting for Cross-Country Income Differences," CEP Discussion Papers dp0667, Centre for Economic Performance, LSE.
  17. Jonathan Temple, 1999. "The New Growth Evidence," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 112-156, March.
  18. 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.
  19. Peter J. Klenow & Mark Bils, 2000. "Does Schooling Cause Growth?," American Economic Review, American Economic Association, vol. 90(5), pages 1160-1183, December.
  20. 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.
  21. 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.
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