Human Capital Spillovers, Labor Migration and Regional Development in China

Abstract

This study applies unique data from the 1990s period of economic liberalization in China to evaluate the effects of human capital spillovers on urbanization and regional agglomeration of human capital. We examine these effects via a utility maximizing directional migration model, which accounts for heterogeneous migration costs and benefits among population strata. We use model estimates to decompose and evaluate human capital spillover effects as derive from three distinct sources, including productivity effects (social returns to schooling), skill premia (skill complementarity in production), and non-wage benefits (quality of life and learning opportunities). In contrast to extant literature emphasizing skill complementarity, we find significantly stronger non-wage than wage effects in the determination of regional human capital agglomeration. However, among low-skill migrants, non-wage benefits are substantially reduced - due likely to urban segregation that deprives low-skill migrants of social externalities. This finding suggests limited human capital spillovers among low-skill migrants and hence dampened long-run growth benefits to Chinese urbanization. Finally, we find that urban concentration of skilled workers was more important than foreign direct investment, the prominent source of technology transfer in China during the 1990s, in attracting skilled workers.