Human Capital Externalities inWestern Germany

The paper sheds light on the impact of spatial agglomeration of humancapital on individual wages in Western Germany. Using panel data itshows that regional wage differentials are to a large extent attributableto localized human capital externalities arising from the regional share ofhighly qualified workers. Employing the regional number of publicschools and of students as instrumental variables the paper shows thathuman capital externalities are underestimated in ordinary panelregressions for wages of highly qualified and non-highly qualified workersalike due to supply shifts of highly qualified workers.[...]