Wage Trickle Down vs. Rent Trickle Down: How does increase in college graduates affect wages and rents?

We extend the Rosen-Roback spatial equilibrium model to show that increasing city-level college share affects the welfare distribution by changing both wages and housing costs across individuals with different education levels. Using the PSID from 1980 to 2013, we confirm that high skilled workers gain greater benefits from living in cities with a rising college share, as the increase in their wage premiums outweighs their rent growth. However, the earnings increases of the unskilled is completely offset by higher housing rents. In cities with influxes of college graduates, housing wealth also increases significantly more for the incumbent college graduates, further widening the welfare gap.