Discussion Papers

No.849 Productivity and Human Capital Agglomeration: Evidence from Indonesian Cities

by Yoshihiro Hashiguchi, Takayuki Higashikata

March 2022


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 total factor productivity (TFP) and geographical human capital agglomeration with controlling for workers' skill levels within a plant. The endogeneity problem in the human capital agglomeration is addressed by the instrumental variable (IV) method. We construct the IV by using the geographical distribution of European population in colonial Indonesia. Our IV estimates suggest that human capital agglomeration has a boosting effect on productivity, implying the existence of human capital externalities.

Keywords: Human capital externalities, plant-level data, Population census in colonial Indonesia

JEL classification: E24, J24, J30, L60, O40

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