Human Capital Externalities in Indonesian Cities

Discussion Papers

No.672

by Yoshihiro HASHIGUCHI and Takayuki HIGASHIKATA

July 2017

ABSTRACT

Using Indonesian plant-level manufacturing data for 1996 and 2006, this study estimates the external benefits of human capital investment. The external benefits are identified from the relationship between plant-level wages and city-level human capital stock, after controlling for workers’ skill levels, plant fixed effects, and time-varying industry fixed effects. Our results suggest that the degree of human capital externalities depends on the size of the urban population, and that such externalities do not occur in cities that either too large or too small. In the case of the Indonesian manufacturing industry, evidence of human capital externalities is observed in cities with a population of between 500 thousand and 1,500 thousand.

Keywords: Human capital externalities, urban areas, plant-level data, Indonesia
JEL classification: E24, J24, J30, L60, O40

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