Human Capital Externalities in Japanese Local Labor Markets

Yudai Higashi
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Yudai Higashi: Faculty of Economics, Kyoto Sangyo University and Research Institute for Economics & Business Administration, Kobe University, JAPAN

No DP2026-17, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: This study examines the effect of the share of college graduates on average wages in local labor markets, using data covering 1990–2020 in Japan. To address the endogeneity of the local college graduate share arising from labor demand shocks for college graduates, the estimation model uses an instrumental variable approach. According to the results, an increase in the share of college graduates has a positive effect on college graduates' wages during the 2000s and 2010s, while it has no significant effect during the 1990s. However, there is no significant effect on the wages of non-college graduates across all sample periods. These results suggest that human capital externalities were generated among college graduates in local labor markets during the 2000s and 2010s, but no such externalities arose from interactions between college and non-college graduates. Overall, external returns to higher education in terms of local wages appear to be limited in Japan.

Keywords: Human capital externalities; External returns to education; Local labor market (search for similar items in EconPapers)
JEL-codes: I26 J24 J31 R23 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2026-05
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