How does Human Capital Affect Chinese Manufacturing Firms’ Markups? Evidence from China’s Higher Education Reform

Abstract

Since the implementation of the higher education reform centered on college enrollment expansion” in 1999, the enrollment scale of China’s ordinary colleges and universities has expanded rapidly. In 2012, the enrollment reached 68.88 million, an increase of 535.7% over 1998. Along with the enlargement of the enrollment scale of ordinary colleges and universities, the number of graduates of ordinary colleges and universities in China has increased rapidly since 2003. A closely related question is whether the rapid expansion of human capital caused by college enrollment expansion” will affect firms’ markups; and if so, what is the possible mechanism behind it? An in-depth study of the above issues will help to understand the driving factors of the changes in the competitiveness of Chinese firms, and also has important practical significance for systematically evaluating the economic effects of college enrollment expansion”.This paper attempts to study the effects of the expansion of human capital on firms’ markups by taking the expansion of Chinese colleges as a quasi-natural experiment. Firstly, this paper summarizes the relevant literature and analyzes the theoretical mechanism. Secondly, it accurately calculates the firms’ markups at the micro level, and constructs the difference-in-differences （DID） model based on quasi-natural experiment. Thirdly, it adopts the DID method to examine the causal effect of human capital expansion on firms’ markups, and tests the validity of the DID model. Fourthly, it uses abundant sample data to investigate the mechanism of human capital expansion affecting firms’ markups, so as to deepen the understanding of the internal relationship between them. Finally, this paper investigates the heterogeneous effects of human capital expansion on firms’ markups from multiple dimensions.The results show that: （1） human capital expansion significantly raises firms’ markups, and on average, human capital expansion can explain 14.8 percent increase in firms’ markups during the sample period; （2） human capital expansion is conducive to the production of high-quality products, thus enabling firms to set relatively higher price levels on the one hand, and it will raise firms’ productivity, thereby reducing the marginal production costs of enterprises on the other hand, that is, human capital expansion raises firms’ markups by both increasing product prices and decreasing marginal cost; （3） the expansion of human capital in natural science and engineering has the greatest effect on firm markups, followed by the field of economic management & law, while the expansion of human capital in other fields has a weakest effect, in addition, human capital significantly raises firms’ competitiveness in eastern and central regions, but such an impact is not obvious in western region.The possible marginal contributions of this paper are mainly in the following two aspects: Firstly, it investigates the impact of human capital expansion on Chinese firms’ markups from the micro-enterprise level, breaking through the limitations of the existing literature at the national or regional macro-level. Secondly, under the framework of a quasi-natural experiment, this paper accurately identifies the causal effect of human capital expansion on firms’ markups by using the DID method, which can effectively deal with the endogenous problem of human capital commonly faced by previous studies.