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 di*erent 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 and be 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 ,nd 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 e*ect is larger for less educated groups, as predicted by 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. c © 2003 Elsevier B.V. All rights reserved. JEL classi!cation: J0; E2