Earnings, education, and economic reforms in urban China

The purpose of this article is two-fold: 1) to document the rate of return to education in urban China, and 2) to investigate the effects of the economic reforms of the 1980s in China both on the level of individual earnings and on the rate of return to education. The theme of the first objective follows a well-established body of empirical literature on human capital. One of the empirical regularities presented by this vast literature is that return to education is inversely related to the level of economic development. G. Psacharopoulos provided a comprehensive summary of the estimates obtained from existing studies using data from different countries and at different points in time. The average estimated rate of return to education for less-developed countries (LDCs) is about 14.4%. Is the rate of return to education in China comparable to that in LDCs, of which China is one? According to two existing studies, the answer seems to be negative. R. Byron and E. Manaloto, using a sample of eight hundred adult workers from the city of Nanjing in China, reported the rate of return to eduction to be less than 3.7%. J. Knight and L. Song estimated the rate of return to eduction to be around 1%, based on a sample of 3600 individuals in urban areas in China. Both studies, however, have certain limitations due to the combination of small sample size and inadequate information in the data used. In this study, I use the data from the Chinese Household Income Project 1988, bu far the most extensive and representative microeconomic data available in China, to conduct a comprehensive estimation of the rate of return to education in China. My estimates suggest that the rate of return to education in China is much lower than the rates that are documented in the literature for LDCs, and that it is generally in line with the findings of Byron and Manaloto.