Economic transition and returns to education in China

This study uses the most recent household survey data from 1995 to estimate returns to education in urban China. Most existing studies in the literature are based on data from the 1980s and find that the rates of return to education in China are remarkably low. This study investigates whether the returns have been underestimated and whether such returns have increased as economic reforms deepen in China. The estimates of returns in this study are considerably higher than previous estimates. Two factors explain the findings: first, previous works using annual earnings instead of hourly wages bias the estimates downward; second, returns to education have increased as the transition process has deepened in China. In addition, average annual returns above the elementary school level are considerably higher than the overall returns. Finally, the private sector rewards highly educated individuals the most, while the state-owned sector rewards low education levels the most, and the returns to education are higher in less-developed, low-income provinces. (C) 2003 Elsevier Science Ltd. All rights reserved.