RIEB Discussion Paper Series No.2024-09

Title

Distinguishing the Urban Wage Premium from Human Capital Externalities: Evidence from Mexico

Abstract

This study bridges the gap between the urban wage premium and human capital externalities in Mexico. High-skilled workers tend to be concentrated in large cities, leading to higher wages in large cities. Merging worker-level microdata with geographical data in Mexico and employing the two-step approach of the Mincer wage equation, this study identifies whether urban wage premium and human capital externalities explain local wage premium, focusing on worker heterogeneity. This study finds that the spatial sorting of workers and firms and human capital externalities entirely explain the urban wage premium in Mexico. An interesting finding is the heterogeneous effect of human capital externalities on the wages of high- and low-skilled workers. Low-skilled workers benefit from human capital externalities, whereas high-skilled workers do not. However, compared with low-skilled workers, high-skilled workers get more than twice the private return to education anywhere they work. This study provides evidence that locations where high-skilled workers are concentrated can pay higher wages to low-skilled workers due to human capital externalities, compensating for their lower private return to education.

Keywords

Urban wage premium; Human capital externalities; Spatial sorting; Private returns to education; Social returns to education

JEL Classification

J31, R12, R23

Inquiries

Keisuke KONDO
Research Institute of Economy, Trade and Industry
Research Institute for Economics and Business Administration
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: +81-78-803-7036
FAX: +81-78-803-7059