Skill differentials, return to schooling, and market segmentation in a transition economy: the case of Mainland China

A body of existing research attributes evident underpayment of workers and low private returns to schooling in China through the mid-1990s to the persistence of labor-market monopsony. We find that rural enterprises overpay production workers relative to a monopsony profit-maximizing benchmark, while there is extreme underpayment of skilled workers relative to the monopsony profit-maximizing amount. This relatively large "exploitation" of skilled workers explains, in a proximate sense, low private returns to schooling. (C) 2003 Elsevier B.V. All rights reserved.