Many studies have found that schooling is an insignificant factor in explaining income differences in China.1 However, schooling rates in China are among the highest in the developing world. The World Bank reports that China was far ahead of other developing countries in terms of both primary and secondary school enrollment in the seventies. The contradiction prompts us to wonder if there are certain benefits of schooling not accounted for in existing empirical studies.
I will use rural secondary school education to show that the conventional estimation method underestimates the returns to education in China by ignoring the segregation of rural and urban labor markets caused by the Chinese government's policy of restricting labor migration. With large income differences present between urban and rural employment, an important reward to schooling is promoting migration. I will use household survey data from a suburban county in Beijing to show that senior high school education earned rather large rates of return in rural areas through raising expectations of migration to urban areas, and that the change in the expected returns explains the recent fluctuations in demand for high school education.2
The paper is organized as follows: The next section provides background information on the Chinese government's policies regarding labor migration from rural to urban areas, and lays out the conceptual role of schooling in exiting rural life. The third section presents a simple theoretical framework to analyze the demand for schooling in the presence of labor market segregation. The fourth section estimates the effects of schooling on labor migration from rural to urban areas by applying binary migration probability models to rural household survey data from Changping county in the suburb of Beijing. The fifth section calculates the rate of return to rural senior high school education utilizing the empirical results of the migration model and an independent estimate of the income differences between urban and rural areas. This is followed by an attempt to explain recent changes in the schooling rate using the findings in the preceding sections. The final section briefly summarizes the empirical findings.
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