Do We Need More Public Investment in Higher Education? Estimating the External Returns to Higher Education in China

Abstract

Despite its significance in policymaking and theory, empirical work on external returns to education has not been fruitful, and most studies focus on developed countries. This paper discusses external returns to education in China, an important developing economy. Using longitudinal data from the China Health and Nutrition Survey, we estimate a fixed-effects instrumental variables model and find positive returns of about 10 to 14 percent. Negligible returns are found for urban, female, and highly educated workers, and returns are positive and statistically significant for rural, male, and poorly educated workers. This suggests that China should increase public investment in education and target rural areas and poorly educated workers. Gender differences in the external returns to education may also imply that China should make more efforts to enhance the capacity of “networking” and competitiveness for women.