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Human Capital and Higher Education: How Does Our Region Fare? (First Quarter 2008 Business Review)

Human Capital and Higher Education: How Does Our Region Fare? (First Quarter 2008 Business Review)

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The number of people in a given state or region with a college education varies across the nation. States in the Third Federal Reserve District (Pennsylvania, New Jersey, and Delaware) compare favorably with the nation on measures of college education and the three states as a whole are close to the national average. Despite its average ranking in educational attainment, the area is a premier location for colleges and universities. In "Human Capital and Higher Education: How Does Our Region Fare?" Tim Schiller evaluates the region's standing with respect to college education by reviewing data on individual and social returns to education, looking at college education as a stimulant to local economic growth, and comparing the tri-state area with the nation as a source of and a destination for college graduates.
The number of people in a given state or region with a college education varies across the nation. States in the Third Federal Reserve District (Pennsylvania, New Jersey, and Delaware) compare favorably with the nation on measures of college education and the three states as a whole are close to the national average. Despite its average ranking in educational attainment, the area is a premier location for colleges and universities. In "Human Capital and Higher Education: How Does Our Region Fare?" Tim Schiller evaluates the region's standing with respect to college education by reviewing data on individual and social returns to education, looking at college education as a stimulant to local economic growth, and comparing the tri-state area with the nation as a source of and a destination for college graduates.

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Published by: Federal Reserve Bank of Philadelphia on Jan 19, 2011
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16 Q1 2008
Business Review 
 
www.philadelphiafed.org
T
BY TIMOTHY SCHILLER 
Tim Schiller
 is a senioreconomic analystin the ResearchDepartment of the PhiladelphiaFed. This articleis available free of charge at www.philadelphiafed.org/econ/br/.
Human Capital and Higher Education:How Does Our Region Fare?
Human capital refers to the tech-nical skills and knowledge acquired byworkers. Education is an investmentin human capital, that is, in the skillsand knowledge that produce a returnto the individual in the form of higherearnings. Education also has socialreturns or spillovers. The presence of educated workers in a region enhancesthe earnings of those who, regardless
1
See the articles by Jacob Mincer; Gary Becker;and James Heckman, Lance Lochner, and PetraTodd.
he number of people with a college educationin a given state or region varies across thenation. States in the Third Federal ReserveDistrict (Pennsylvania, New Jersey, andDelaware) compare favorably with the nation on measuresof college education, and the three states as a whole areclose to the national average. Despite its average rankingin educational attainment, the area is a premier locationfor colleges and universities. In this article, Tim Schillerevaluates the region’s standing with respect to collegeeducation by reviewing data on individual and socialreturns to education, looking at college education asa stimulant to local economic growth, and comparingthe tri-state area with the nation as a source of and adestination for college graduates.
of their own educational level, workwith or near educated workers. Thisis especially true for spillovers fromcollege-educated workers. Researchshows that having large numbers of college graduates in a region increasesthat region’s economic growth and thatspillovers (also called externalities)are an important factor in generat-ing more rapid growth. Aware of thisconnection, educators, state and localgovernments, and businesses aroundthe country are making efforts toincrease the educational attainment of their local work forces, especially thenumber of college graduates.The number of people in a regionwho have a college education variessignificantly across the nation. Parts of the three-state region (Pennsylvania,New Jersey, and Delaware) compare fa-vorably with the nation on measures of college education, and the three statesas a whole are close to the nationalaverage. In spite of its average rankingin the nation, the region is one of thepremier locations for college education.The area’s colleges and universities areimportant sources of college-educatedworkers for the nation and the world.In evaluating the region’s standingwith respect to college education, wemust consider its important role as aproducer of college graduates as wellas its role as a user of college-educatedworkers.To help with this evaluation, I willreview what we know about individualand social returns to education, lookat college education as a stimulant tolocal economic growth, and compareour region to the nation as a sourceof, as well as a destination for, collegegraduates.
 EDUCATION: AN INVESTMENTIN HUMAN CAPITAL
Education represents an invest-ment in the knowledge and skills thatincrease people’s ability to earn. Thecost consists of the direct outlays foreducation as well as the opportunitycost of forgone income during the timespent acquiring the education. Thereturn is the increase in earnings thatresults. Economists have measured thereturn to education over many yearsand found that it increases steadilyfor each level of education attained.
1
 Data from the U.S. Bureau of Labor
 
 
Business Review 
Q1 2008 17
www.philadelphiafed.org
Statistics show that earnings rise andunemployment declines for each higherlevel of education (Table 1).The economic importance of education has been growing. Even asthe number of college graduates in thelabor force has increased, the wagegap between these workers and thosewith less education has widened. Theincreased wage reflects an increase indemand that has been greater than theincrease in supply. Firms have beeninvesting in new technologies that re-quire more workers with the educationand skills to use them, and more andmore of the nation’s economic growthhas been originating in sectors withhigh demand for skilled workers.
2
Theinvestment in new technology couldreflect firms’ desire to take advan-tage of the increase in the supply of college-educated workers. Or it couldbe a result of the development of newgeneral-purpose technologies, such asadvances in computers and telecom-munications, that either require or aremost productively used by educatedworkers. In either case, the increasingpremium for college-educated workersin the face of rising supply indicatesthat the growth in demand for college-educated workers has exceeded thegrowth in supply.
 EDUCATION SPILLOVERSAND REGIONAL ECONOMICPERFORMANCE
 In addition to providing a returnto the individual, investment ineducation results in spillovers thatbenefit others who work with or nearindividuals who have made the invest-ment. Spillovers provide the economicjustification for public subsidies foreducation and motivate communityinterest in improving the educationalattainment of the population.
3
Since
TABLE 1Unemployment and Earnings of Workers 25 Years and Older (2006)
 EducationUnemployment RatePercentMedian Weekly EarningsDollars
Doctoral Degree1.41,441Professional Degree1.11,474Master's Degree1.71,140Bachelor's Degree2.3962Associate's Degree3.0721Some College, No Degree3.9674High School Graduate4.3595Less Than High School Diploma6.8419Source: Bureau of Labor Statisticsspillovers appear more likely to stemfrom college-educated workers thanfrom those with less education, muchof the economic research on spillovershas focused on the extent of collegeeducation among the population understudy.
4
 Social interaction is the primaryway in which spillovers occur, whetherby chance or by plan. This interactionis most likely to lead to productivespillovers if it occurs in a work context.This context can be provided in a met-ropolitan area with a high concentra-tion of firms in the same industry, andit can also be provided in an area witha diversity of industries.
5
In the firstcase, employees from different firmsin the same industry can exchangeideas about new products and produc-tion methods more readily because of 
2
See the article by Keith Sill.
3
See the article by Robert Topel.
4
See the article by Susana Iranzo andGiovanni Peri.
5
See the article by Gerald Carlino.
 
18 Q1 2008
Business Review 
 
www.philadelphiafed.org
the dense concentration of employeeswho work in the same industry. In thesecond case, the diversity of industriesallows ideas developed in one industryto be more widely disseminated toother industries, where the new ideas,perhaps with some modifications, canalso be productively applied. In bothcases, exchanges of information aboutproductivity-enhancing possibilitiesare more likely in areas with greaterpopulation size, density, and industrialvariety.Innovation, spillovers, and im-proved productivity are more likely inmetropolitan areas with large con-centrations of workers with highereducation. Empirical research supportsthis insight, demonstrating that earn-ings, which are based on productivity,are greater in metropolitan areas thathave greater concentrations of collegegraduates. Research by Enrico Morettiestimates that a one-percentage-pointincrease in the supply of college gradu-ates in a metropolitan area raises wagesfor workers in that area: 1.9 percent forhigh school dropouts, 1.6 percent forhigh school graduates, and 0.4 percentfor college graduates.
6
Furthermore,research by Edward Glaeser and DavidMaré finds that growth in earnings ap-pears to be more rapid in urban areas;an initial wage increase of about 7percent when workers first move fromrural to urban areas rises to an urban-rural difference of about 10 percent inthree to five years.By making workers more produc-tive, education enables faster earningsgrowth for the educated individual.Additionally, various research studies
6
The increase in wages for college graduatesis the net effect of two offsetting factors:spillovers, which raise wages, and the increasein supply of college graduates, which tends toreduce wages. The small positive net resultindicates that the spillover effect slightlyovercomes the supply effect.
have revealed that areas with concen-trations of educated residents are morelikely to have faster growth in popula-tion, employment, and productivitythan areas where college-educated resi-dents are less concentrated.
7
Of course,college graduates are likely to relocateto obtain employment early in their ca-reers; therefore, rapidly growing areasare likely to attract them. Thus, thereis a certain counterbalance betweeninfluences: Concentrations of col-lege graduates influence growth, andgrowth influences the concentration of college graduates. I discuss this in moredetail later when I talk about local areaefforts to increase the college-educatedshares of their populations.
RAISING THE LEVEL OF EDUCATIONAL ATTAINMENTIN A REGION
As we have seen, college educa-tion is beneficial to the individualwho possesses it. It also has spilloverbenefits for co-workers and residentsof a region where large numbers of college graduates work and live. Whatare some of the factors that affect theeducational attainment of an area’spopulation? At first glance, it wouldseem that an area that produces a largenumber of college graduates wouldhave a greater percentage of popula-tion with bachelor’s degrees or higher.The production of college gradu-ates is notably evident in the Pennsyl-vania-New Jersey-Delaware region. Alarge number of colleges and universi-ties produce large numbers of collegegraduates, although there is variationamong the three states. Pennsylvaniaranks high among all states in the U.S.in the number of colleges and univer-sities and in the number of degreesawarded, both absolutely and whenadjusted for total state population.New Jersey ranks somewhat aboveaverage on both measures absolutely,but below average when adjusted fortotal state population. Delaware ranksbelow average on both measures abso-lutely; however, when the measures areadjusted for total state population, thepercentage moves above average in thenumber of degrees awarded but not inthe number of institutions. (See Tables2 and 3 for state data and rankings.)Pennsylvania and Delaware“produce” more college graduates thanthey “consume,” and New Jersey “pro-duces” fewer graduates. That is, thetotal number of freshmen enrolled inPennsylvania and Delaware is greaterthan the number of college freshmenamong those states’ population. (Penn-sylvania and Delaware bring in somestudents from out of state.) The totalnumber of freshmen enrolled in New Jersey is lower than the number of col-
7
See the articles by Curtis Simon and ClarkNardinelli; Edward Glaeser, Jose Scheinkman,and Andrei Schleifer; James Rauch; andChristopher Wheeler.
Pennsylvania ranks high among all statesin the U.S. in the number of colleges anduniversities and in the number of degreesawarded, both absolutely and when adjustedfor total state population.

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