ABSTRACT
There has been a growing interest in studying education and human capital investment in China (see Heckman, 2002; Wall Street Journal, 2003).1 At the core of this issue is how an individual’s earnings capacity is affected by education. This so-called private return to education, measured by increased earnings, is related to a number of important policy issues. Based on Heckman (2002), if the return to human capital investment is higher than that of physical capital investment, the Chinese government should raise its spending on education. On the other hand, the return to schooling is also critical for an individual’s decision to invest in his/ her own education. Therefore, the effect of education on earnings has important implications for both public and private investment in education. Furthermore, given the widespread wage compression in the old planning economy (Fleisher and Wang, 2004a), the extent to which education is rewarded is also an important indicator of the overall development of the Chinese labor market.
