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Social Returns to Human Capital and the Spatial Distribution of Productivity amongst British Firms

This paper investigates the social returns to investments in human capital by examining the relationship between the productivity of British manufacturing firms and the stock of highly educated individuals (at college degree level) within suitably defined nearby areas and sectors, reflecting geographic and economic distance. This approach allows me to capture not only the private returns to firms from investing in a more qualified workforce (including rents captured by employers) but also other potential spillovers such as those considered by Marshall (1890) and Lucas (1988). This research, based on cross sectional data for 1991 and a two-period panel of firms (1981-1991), provides compelling evidence that the statistical relationship between skills and productivity is not entirely spurious. Assisted by these estimates, I simulate the productivity gains of increasing the British share of college-educated adults by one percentage point and find the resulting figure to be in the same order of magnitude, though still higher than the implicit costs. I then show that a similar aggregate social cost/benefit test would only be marginally passed if private wage returns were just considered, the latter accounting for almost two thirds of the total social benefits.