Estimating external returns to education in the US: a production function approach

Individual US data are merged with aggregate data by state for the US and used to estimate the external benefits of education. Aggregate state-wide variables used are the average level of education and per capita physical capital for each state. Individual variables used are each working adult's labour force experience, years of completed schooling, gender and immigration status. One difference from previous studies that estimate external benefits to education is that data on physical capital for each region (state) are available and used. Hence, the study is based on an explicit production function of the form suggested by Lucas. Strong evidence of the presence of external benefits to education for the US is found.