Wage Trickle Down vs. Rent Trickle Down: How Does the Increase in College Graduates Affect Wages and Rents?

55 Pages Posted: 2 Aug 2017 Last revised: 12 May 2018

See all articles by Jung Hyun Choi

Jung Hyun Choi

The Urban Institute

Richard K. Green

University of Southern California - Lusk Center for Real Estate

Eul Noh

University of California, San Diego (UCSD), Division of Social Sciences, Department of Economics

Date Written: August 1, 2017

Abstract

This study examines how the changing composition of adult educational attainment in cities affects the distribution of wages and rents in those cities. We extend the Rosen-Roback spatial equilibrium model to show that as the share of college graduates increases, the impact of this change on the overall welfare of skilled and unskilled workers varies, particularly when individuals have different locational preferences and as housing supply takes time to adjust to changing demand. Using the PSID from 1980 to 2013, we find that college graduates gain higher wage premiums in cities where the share of college graduates are increasing. On the other hand, those without college education do not experience the same wage benefit, and some even experience wage losses. These results hold even after controlling for unobserved characteristics of individuals and cities. Rental prices also increase in cities that experience growth in the share of college graduates. On average, the increase in rental costs offsets the earning increases, and thus the residual earnings do not change in cities with greater influxes of high skilled workers. However, the gains and losses differ across individuals with different levels of education. For college graduates, we find that the increase in earnings benefits is greater than the increase in rental cost in cities with growing shares of college graduates. For those without college degrees, rental cost increases outweigh the increase in earnings in these cities. This suggests that less skilled workers can become worse off in cities that attract college graduates, especially in the short run.

Keywords: Wage, Rent, Human Capital Externality, Welfare Distribution

JEL Classification: D31, J23, J24, J31, R21, R23, R31

Suggested Citation

Choi, Jung Hyun and Green, Richard K. and Noh, Eul, Wage Trickle Down vs. Rent Trickle Down: How Does the Increase in College Graduates Affect Wages and Rents? (August 1, 2017). Available at SSRN: https://ssrn.com/abstract=3012186 or http://dx.doi.org/10.2139/ssrn.3012186

Jung Hyun Choi (Contact Author)

The Urban Institute ( email )

2100 M Street, NW
Washington, DC 20037
United States

Richard K. Green

University of Southern California - Lusk Center for Real Estate ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Eul Noh

University of California, San Diego (UCSD), Division of Social Sciences, Department of Economics ( email )

CA
United States
8589523067 (Phone)

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