Estimating the Social Return to Higher Education: Evidence from Longitudinal and Repeated Cross-Sectional Data

Economists have speculated for at least a century that the social return to education may exceed the private return. In this paper, I estimate spillovers from college education by comparing wages for otherwise similar individuals who work in cities with different shares of college graduates in the labor force. A key issue in this comparison is the presence of unobservable characteristics of individuals and cities that may raise wages andbe correlated with college share. I use longitudinal data to estimate a model of non-random selection of workers among cities. I account for unobservable city-speci!c demand shocks by using two instrumental variables: the (lagged) city demographic structure and the presence of a land-grant college. I find that a percentage point increase in the supply of college graduates raises high school drop-outs’ wages by 1.9%, high school graduates’ wages by 1.6%, and college graduates wages by 0.4%. The effect is larger for less educatedgroups, as predictedby a conventional demand and supply model. But even for college graduates, an increase in the supply of college graduates increases wages, as predicted by a model that includes conventional demand and supply factors as well as spillovers.

Enrico Moretti

Journal of Econometrics

January 2004

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