Do the Recent Labor Market Changes Negatively Affect the Schooling?

    Abstract:  The Chinese labor market has witnessed great transition from dual labor market to a new classic one. With growing wages for skilled workers, its impact on schooling should be concerned by policy makers. Taking advantage of national representative data with large sample, this paper empirically examine the hypothesis that increasing opportunity costs reduce schooling. The empirical result is of particular relevance to poor areas where people tend to have high discount rate and value more on real time income. Although the total public investments in education have been increasing substantially, based on the study in this paper, it is still worth noting that targeting the relevant regions and compensating opportunity costs will improve the efficiency of the investments.
    Do the Recent Labor Market Changes Negatively Affect the Schooling?Du Yang and Cai Fang2012-10-10 9:11:45Abstract:  The Chinese labor market has witnessed great transition from dual labor market to a new classic one. With growing wages for skilled workers, its impact on schooling should be concerned by policy makers. Taking advantage of national representative data with large sample, this paper empirically examine the hypothesis that increasing opportunity costs reduce schooling. The empirical result is of particular relevance to poor areas where people tend to have high discount rate and value more on real time income. Although the total public investments in education have been increasing substantially, based on the study in this paper, it is still worth noting that targeting the relevant regions and compensating opportunity costs will improve the efficiency of the investments.
    1. Introduction
    The Chinese labor market has witnessed dramatic changes in recent years, which is characterized as frequent labor shortages and growing wages for unskilled workers. The implications for these changes are rich both for current labor market participants and for the future entrants as well. Although it’s quite evident to see the impacts of the changing labor market outcomes on workers’ behaviors and welfare, its second order effect is often neglected. Among them, whether the wage increase for unskilled workers encourages the students to drop out of schooling is of great importance for policy makers to respond.
    The ignorance of such impacts of current labor market outcomes on the future labor market participants is quite dangerous for China’s economic development. First of all, with declining potential growth rate (Cai and Lu, 2012), the future economic growth in China heavily relies on productivity growth, which is on the premise of a higher level of human capital. After passing through the Lewis turning point, due to the exhaustion of surplus labor, it is much more difficult for China to gain economic growth through reallocating labor from low productivity sectors to high productivity sectors. For instance, according to our estimation (Du, et. al., 2011), reallocating labor from agricultural to non-agricultural sectors has contributed to 23.1% of economic growth in the first five years of this century, but the share has declined to 11.7% in the subsequent five years. If we compare this results to the estimation on the last two decades in the last century (the World Bank, 1997), it has also witnessed a significant decreased contribution. In order to sustain the economic growth, which is necessary to a middle-income country approaching to a high-income economy, China will have to help the workers to enhance their productivity at their new sectors by improving their human capital when the economic growth is hard to be achieved by simply moving the labor across sectors with different levels of productivity.
    Second of all, unlike many other social policies, the government is the most important stakeholder because of the large externality of education investment. When facing with growing opportunity costs of schooling, it seems rational for individuals to give up schooling and to participate in labor market although the Compulsory Education Law has already regulated minimum level of education one has to complete. This is particularly true for poor families that tend to have high discount rate and value more on current income. Under such a circumstance, the country will bear the price of loss in social returns of education. To offset the negative externality of individual decision, the government must take the responsibility to respond the negative externality in public policy.
    Thirdly, the timing of policy intervention in individual decision of schooling is quite urgent. As we know, most of labor market participants accumulate their human capital before entering the market, so current decisions may affect the future productivity. When facing with growing wages, the government has to react promptly to keep the students in school in order to catch up the window. Otherwise, the workers in the future labor market would miss the change to accumulate the human capital they should have.
    Although the classic theory predicts the negative impacts of high opportunity costs on schooling decisions, there is sparse empirical evidence in China to support this argument. Data limitation in China is one of the main reasons that confine the empirical studies. To sketch the overall situations, national representative datasets are needed. However, the statistics on schooling that is based on reporting system conducted by education administrative system is notorious for low quality. In addition, combining wage information with schooling decision variables together makes more difficulties. Taking advantage of two rounds of population census data, this paper tries to make some progress in empirical studies.
    In this paper, we look at a specific group of children facing with schooling decisions, i.e., kids between age 13 and 16. The reasons to focus on this group of children are as following. First, children at this age group are supposed to study in junior high school. According to the Compulsory Education Law in China, this is also a stage of compulsory education, which means that both the government and the parents are responsible for this group of children to complete the education. Second, when reaching age 16, those children are legitimated to enter the labor market and not taken granted as child labor any more. Therefore, the changing labor market outcomes may be very attractive to this group children and affecting their schooling decision.
    In contrast to urban areas, the growing wages for unskilled workers would have large impacts on schooling decisions in rural China, in particular for those who live in poor areas. In general the poor family tends to have high discount rate, which makes them value more on current incomes when making intertemporal choices. In addition, although the population policy is universal all over the China, there is still significant distinction between rural and urban areas whereas the women in rural areas are generally allowed to have two or even more children by the policy. For some minorities that belong to the targeted group of this study, the population policy is even more relaxed. Considering that the central and western China is less urbanized than the developed regions, the fertility rates are higher in those areas too. As we have already seen shrinking supply of young workers in China, it is good to believe that in the future the less developed regions in China will play more important role in labor supply. Therefore, for the sake of sustaining economic growth it is of great importance for China to enhance the quality of future human resource in those regions by increasing and improving the education investments in both school infrastructure and individual subsidy as well.
    The rest of the paper is organized as follows. The next section describes the labor market changes and how they affect the schooling decisions. Section three introduces the data we use in this paper and the main variables of interests. In section four we take advantage of national representative data to examine how the growing wages of relevant group of workers affect the schooling decisions in the targeted group of kids we are interested. The last section discusses the main findings in this paper and draw conclusions……
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