Finance and Economics Discussion Series

Education's Role in China's Structural Transformation

Soohyung Lee and Benjamin A. Malin
2009-41

Abstract: We explore education's role in improving the allocation of labor between China's agricultural and nonagricultural sectors and measure the portion of China's recent growth attributable to this channel. Building from micro-level estimates, we find that education's impact on labor reallocation between sectors accounts for about 9 percent of Chinese growth, whereas its impact on within-sector human capital growth explains only 2 percent. Our findings suggest that, when frictions cause large productivity gaps across sectors and returns to education are greater in higher-productivity sectors, education policy may be a useful tool for increasing efficiency.

Keywords: Returns to education, structural transformation, China, labor reallocation, economic growth