Part II: Developing Rhode Island’s human capital

Economists have long recognized that that there is a strong correlation between a city’s or state’s “human capital” – the accumulated knowledge, skills and experience of its people – and its potential for economic growth and development. At the individual level, of course, the impact of education on earnings is widely recognized. During the years 2006-2010, as Figure 2 shows, the median income of Rhode Island residents who had four-year college degrees was nearly $20,000 greater than the median income of those who had only a high school diploma.

Source: 2006-2010 American Community Survey (Social Explorer)

The benefits of higher education, however, are not limited to those who earn degrees. In a paper published by the New York Federal Reserve Bank, Jaison Abel and Todd Gabe found that “a one percentage point increase in the proportion of residents with a college degree is associated with a 2.3 percent increase in metropolitan-area GDP per capita.” Summarizing the results of previous studies, Abel and Gabe cite two explanations for the powerful link between human capital and economic growth.

First, human capital increases individual-level productivity and idea generation. Second, the concentration of human capital within a region facilitates knowledge spillovers, which further enhance productivity and fuel innovation. Indeed, Glaeser suggests that human capital is a key predictor of urban success because “high skilled people in high skilled industries may come up with more new ideas.” In addition, a region’s stock of human capital has been shown to lead to more rapid reinvention and increases in the long-term economic vitality of cities.[1]

 

Even non-college educated workers benefit from these spillover effects. Enrico Moretti, professor of economics at the University of California, has shown that a 1 percentage point increase in the percentage of a city’s workers who have college degrees is associated with a 1.6 percent increase in the earnings of workers who only have high school diplomas. [2]

Other research suggests that the spillover effects of higher education may be even greater at the state level. Edward Glaeser, professor of economics at Harvard University, has estimated that increases in educational attainment at the state level have a “social multiplier” of 2.21 – for every 1 percent increase in the college-educated share of a state's population, average earnings increase by 2.21 percent. This finding, he notes, is consistent with the idea that workers’ “individual earnings are a function both of their own schooling and the schooling of their neighbors.”[3] 


[1] Jaison Abel and Todd Gabe, “Human Capital and Economic Activity in Urban America,” Federal Reserve Bank of New York, staff report no. 332, July 2008, pp. 1-2.

[2] Enrico Moretti, “Social Returns to Human Capital,” NBER Reporter: Research Summary, Spring 2005; and Moretti, The New Geography of Jobs, Houghton Mifflin Harcourt, 2012, pp. 100-101.

[3] Edward Glaeser, Bruce Sacerdote and Jose Scheinkman, “The Social Multiplier,” NBER Working Papers 2002, p. 18.