Estimating the social return to higher education

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. OLS estimates show a large positive relationship between the share of college graduates in a city and individual wages, over and above the private return to education. A key issue in this comparison is the presence of unobservable individual characteristics, such as ability, that may raise wages and be correlated with college share. I use a confidential version of the National Longitudinal Survey of Youth (NLSY) to estimate a model of non-random selection of workers among cities. By observing the same individual over time, I can control for differences in unobserved ability across individuals and differences in the return to skills across cities. I then investigate the hypothesis that the correlation between college share and wages is due to unobservable city-specific shocks that may raise wages and attract more highly educated workers to different cities. To control for this