Human Capital Externalities and Growth of High- and Low-Skilled Jobs

Human capital is unequally distributed across cities or regions within a country. The way how the spatial distribution of human capital evolves over time sheds light on the strength of concentration forces for high-skilled workers, such as localised increasing returns to human capital. In this paper I analyse the impact of human capital on local employment growth for Western German regions (1977–2006). Two main empirical facts are established: “Skilled cities” inWestern Germany grow faster. At the same time there is convergence of human capital shares across cities, i.e., high-skilledworkers do not increasingly concentrate in space.Whereas the first fact (the “smart city hypothesis”) similarly holds in Germany and in the US, there is a striking difference when it comes to the second fact. Some researchers have found an opposite trend of human capital divergence across US metropolitan areas. My findings suggest that human capital exhibits a different spatial trend in different countries. I present a theoretical model which shows that the spatial convergence trend does not imply that concentration forces for high-skilled workers are absent inWestern Germany, but only that they are relatively weak compared to countervailing dispersion forces. I further discuss some reasons that may explain the differences between Western Germany and the US. I emphasise the role of the tax system and the impact of pro-dispersive regional policy in Europe.