"Human Capital and Economic Activity"

"Human Capital and Economic Activity in Urban America"
Jaison R. Abel and Todd M. Gabe, Staff Report Federal Reserve Bank of New York, July 2008 Number 332.

Abstract:

This paper examines the relationship between human capital and economic activity in U.S. metropolitan areas, extending the existing literature in two important ways. First, we utilize new data on metropolitan-area GDP to measure economic activity. Using educational attainment as an indicator of human capital, we find that a one-percentage-point increase in the proportion of residents with a college degree is associated with a 2.3 percent increase in metropolitan-area GDP per capita. Second, we move beyond the conventional proxy for human capital—educational attainment—to develop new measures that reflect the types of knowledge within U.S. metropolitan areas. Results show that knowledge associated with the provision of producer services and information technology are particularly important determinants of economic vitality in U.S. metropolitan areas.

The SSTI Weekly Digest for July 23, 2008 states:

While not the subject of the paper, community and regional policymakers may expect if they couple this fact with the other benefits associated with having a more educated populace - such as lower crime rates, lower vacancy rates, higher property values, and more entrepreneurship - that subsidized higher education programs should "pay" for themselves through higher tax revenues and lower costs to the public.

Comment: The research suggests that investment in higher education pays off in economic growth in U.S. urban areas. I am not sure that the SSTI corollary holds. For example, it may be simply that educated people are more likely to figure out that there is more money in the big cities and move to one.

Indeed from a national point of view, I want people to move to the places in which their education pays off best. So, perhaps federal support for scholarships and loan guarantees are more appropriate than local subsidies. Indeed, what might make most sense would be federal incentives to local subsidies, reflecting the reality that while some recipients of locally subsidized educational funding will remain in the local area, others will be moved and there will be spillover benefits to other cities in the country. Of course, all of this depends on the United States being able to retain the university graduates it trains. JAD


This table of the highest income metropolitan statistical areas in the United States from the report might be of interest.