Human capital externalities or consumption spillovers? The effect of high-skill human capital across low-skill labor markets *

Previous studies often interpret the positive impact of high-skill human capital on the mean wages of low-skill workers as evidence of human capital externalities. Using a grouped IV quantile technique, we uncover a distributional wage effect of high-skill human capital that is difficult to reconcile with the standard models of human capital externalities: the city-level share of college graduates has a positive impact on the wages of low skill workers at the lower, but not the upper, quantiles of the wage distribution. We then provide a comprehensive assessment and discussion of the effect of high-skill human capital on low-skill wages in different occupations. We find a large and positive wage effect in the service occupations but not in the manufacturing occupations. We argue that consumption spillover, instead of human capital externality, is the underlying mechanism. These findings invite reinterpretation of previous studies on human capital externalities in low-skill labor markets.