Economic Transition and Returns to Education in Urban and Rural China, 1988 to 2002

Abstract

This thesis examines changes in the returns to education in urban and rural China as the nation underwent a transformation from a planned economy to a market economy. Using the basic Mincer type equation, I estimate the overall rates of return to an additional year of schooling to be 3.4 percent in 1988, 4.7 percent in 1995 and 7.5 percent in 2002. The significant increases in the returns to schooling coincide with improvements in both labor market efficiency and educational quality over the course of economic reforms. The results show that rural individuals consistently experience higher returns to education than urban individuals, possibly because of the shortage of skilled labor in rural areas. Similarly, workers in coastal cities benefit more from additional schooling than workers in inland cities, largely as a result of uneven regional development in urban China. Due to various education reforms and greater competitiveness in the labor market, the wage premium fell for less educated individuals and increased for highly educated individuals over time. All in all, the social and economic consequences of the increasing returns to education have important policy implications. Since the problem of rising income inequality is largely caused by the differential rates of return to schooling, policymakers should strive to break down the barriers that divide Chinese society and equalize access to educational resources and employment opportunities for all individuals.