Linking economic geography with education

A nice short note by Natalia Kolesnikova of St Louis Fed.

She begins with linking education to wages:

The relationship between education and wages is a subject of intense study in the field of labor economics. Researchers are particularly interested in determining whether causal factors underlie this statistical correlation. For example, do advanced education programs make people more productive, so that higher wages are the by-product of higher productivity? Or do these programs naturally attract the most productive members of society, so that education per se is inconsequential for determining wages?

Such questions could be answered in a straightforward manner if economists could perform controlled experiments. For better or worse, such experiments are not feasible. You would have to have two identical people, send only
one to college, and record the results. Instead, economists try to compare people who share many common characteristics except education. Most studies find that, after controlling for other characteristics, each additional year of education  increases hourly wages by 8 to 13 percent.

However such analyses does not include location specific issues:

A complication of such estimates is that the return to investment in human capital is realized in a specific labor market, usually a local labor market. Investment in human capital is not like investment in the stock market, where a share of General Electric stock is worth the same in New York as it is in St. Louis. One study finds that the return to a college education is systematically lower in nicer, more-expensive cities.

The intuition is simple: When a city has attractive amenities, people are willing to “pay” for them in the form of
high property prices. However, people with low levels of education, and thus low lifetime income, find such high property prices a greater deterrent to living in these cities than individuals with high levels of education. The bettereducated  might even accept a lower salary than they would in less-attractive cities. In contrast, the less-educated might have to be paid more than they would in less-attractive cities to compensate for the higher cost of living.

As a result, the discrepancy in pay attributed to education is smaller in high-cost than low-cost cities. The bettereducated are not at a disadvantage when they choose to locate in a nicer, more-expensive city, however. They are simply “paying” for access to the city’s amenities by accepting a lower monetary return to their education.

Hmm. There is a table which shows return on wages in different US cities.

In 2000, in Dallas, white men with a college degree earned as much as 85 percent more than similar white men with a high school diploma, but in Seattle they earned only 50 percent more (but enjoyed all the amenities Seattle offers).

Will be interesting to read a study based on Indian cities as well.


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