Here’s a splash of cold water regarding the mighty Chinese economy: as of 2015, 70% of China’s entire labor force have never attended high school. By contrast, 92% of the United States’ labor force have graduated high school as of 2016.
Low high school attainment isn’t just a problem for China’s workers – it’s a problem for China’s economy as a whole. China’s economy is at risk of experiencing the “middle-income trap,” a phenomenon in which economies can no longer compete with low-income and high-income economies. Low-income economies can manufacture more cheaply (American companies outsourced manufacturing to China, and now they’re outsourcing to Vietnam) while high-income economies produce more competitive high-value goods and services. Escaping the trap depends on an educated workforce – economies that transitioned from middle-income to high-income status such as South Korea, Israel, and Ireland averaged high school education rates of over 70% before their transitions.
Today, though nearly every urban student in China attends high school, 17-23% of rural students aren’t attending any amount of high school. One explanation for why rural attendance lags behind is that high school in China may not pay off, especially when one considers that high school costs tuition in China, and wages for unskilled jobs have trended upwards in recent years.
Using nationally representative data from 2016 on 1,676 urban and rural laborers from the China Family Panel Studies dataset, my analysis shows that an additional year of high school is correlated with a 7.37% higher hourly wage on average. Given that the average rural hourly wage is 6.54 RMB/hour while average rural high school tuition is approximately 1950.54 RMB/year, holding all other variables constant, completing high school pays off 14 years after graduation. And because the legal retirement age in China is 60 years, a high school education pays off even more in the long run.
But what about other factors that explain both education and wages? We know, for instance, that education is selective based on ability – individuals with higher levels of unobserved ability will, on average, both have more education and higher wages. You may expect that if we control the effect of unobserved ability, the relationship between education and income would plunge to insignificance.
Your expectations would be wrong. After controlling for ability, my analysis shows that one year of high school goes from being correlated with 7.58% higher hourly wages on average to 7.37% higher hourly wages on average – a change so small, I hesitate to conclude that controlling for ability impacted the return to high school whatsoever.
If rural students are the ones who experience lagging high school attendance rates, then it may be that rural students in particular experience lower returns to high school education compared to the population at large. Yet when I restrict my sample to just rural individuals participating in non-agricultural labor, an additional year of high school correlates with 8.54% higher hourly wages on average. It appears that rural individuals experience higher returns to high school compared to the population at large.
Given that high school attendance is economically rational, it seems puzzling that approximately a fifth of all rural Chinese students do not attend high school. After all, the proliferation of vocational and academic schools alike has widely expanded access to high school education throughout China.
I posit two explanations. First, there’s a big difference between reality and perception. Even if a high school education pays off in the long run, a 15-17 year old whose brain is still developing may not perceive the benefits, especially when payoff comes 10+ years in the future. Second, psychological stressors like bullying, low grades, poor relationships with teachers, and absence of mentor figures explain middle to high school dropout behavior in China. The persistence of these stressors would make high school attendance untenable, regardless of economic value.
High school education is economically valuable in China. The challenge now is to determine how to keep students in school when that isn’t enough.
Richard J. Liu is a senior at Indiana University majoring in Economics with a Liberal Arts Management Program certificate. Originally from Columbus, IN, Richard is passionate about understanding and addressing inequality in China and the United States. Richard has previously explored topics ranging from China’s coal conversion industry & wastewater sector to serious games that teach players about quantum computing and LGBTQ+ lived experiences.
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