Agglomeration and Human Capital

Yujiang River Chen and Coen Teulings

No 20201, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Agglomeration externalities; Cities; Regional house prices; Spatial sorting; Public return to human capital (search for similar items in EconPapers)
JEL-codes: I26 J24 J31 R12 R13 (search for similar items in EconPapers)
Date: 2025-05
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