Estimating the External Returns to Education: Evidence from China

Abstract

We examine how individual wage changes associated with the share of college graduates in a given province using longitudinal data from China Health and Nutrition Survey. The individual fixed effect model shows that the external returns to education in China appear to be zero. We estimate an instrumental variables fixed effects model where share of college graduates is instrumented by the number of universities with special status and find positive external returns to education of about 10% to 14%. We also find the returns are affected by individual heterogeneity. While negligible returns are found for urban, women and highly-educated workers respectively, the returns are positive and statistically significant for rural, men and low educated workers. This finding provides motivations for increasing education investment in rural China and targeting it more towards poorly educated workers.