published in: Pacific Economic Review, 2004, 9(3), 155-171
This paper uses newly available Chinese micro data to estimate the return to college
education for late 20th century China when allowing for heterogeneous returns among
individuals selecting into schooling based on these differences. We use recently developed
semiparametric methods to identify the parameters of interest. We demonstrate that
heterogeneity among people in returns to schooling is substantial. People sort into schooling
on the basis of the principle of comparative advantage, which we document to be an
empirically important phenomenon in modern Chinese labor markets. Standard least squares
or instrumental variable methods do not properly account for this sorting. Using new methods
that do, we estimate the effect on earnings of sending a randomly selected person to college
is a 43% increase in lifetime earnings (nearly 11% annually) in 2000 for young people in
urban areas of six provinces of China. The effect of college on those who go is 13%. Our
evidence, and simple least squares evidence, suggests that after 20-plus years of economic
reform with market orientation, the return to education has increased substantially in China,
compared to the returns measured in the 1980’s and the early 1990’s.
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