Abstract
Some literature observes the negative but not very significant effect of household wealth growth on children's educational outcomes. This surprising finding is not easily reconciled with the traditional explanation that relaxed economic constraints caused by wealth growth can promote human capital accumulation. This paper proposes an alternative explanation for the causal relationship between wealth growth and human capital, which could be negative: individuals tend to reduce human capital investment following the decline in their labor supply induced by wealth growth, given that investing in human capital is mainly for employment competitiveness. This explanation is supported by evidence from the case of urban housing demolition in China, in which affected households could obtain substantial wealth growth by considerable demolition compensation thanks to the real estate boom in China. Specifically, using two nationally representative datasets, we find that Chinese households that have experienced demolition relatively have more wealth, less labor supply, lower propensity to accumulate children's human capital, and consequently, have children with lower educational achievement. These results suggest that China's economy may be losing its momentum because of the decline in labor supply and human capital accumulation brought about by the ongoing large-scale urban housing demolition.
Highlights
Does household wealth growth improve children’s human capital, especially for instant and substantial wealth growth such as winning a lottery? If the lack of wealth constrains human capital investment, as Becker and Tomes (1986) propose, an increase in wealth should relax budget constraints and help accumulate human capital, such as in the abundant findings of Filmer and Schady (2011), Lovenheim (2011), and Dahl and Lochner (2012)
The key assumption underlying the association between household wealth from urban housing demolition (UHD) and children’s human capital accumulation is that UHD could result in significant wealth growth for UHD households and reduce labor supply of individual adults affected by UHD
We use the empirical setup of the differences in whether households experienced UHD
Summary
Does household wealth growth improve children’s human capital, especially for instant and substantial wealth growth such as winning a lottery? If the lack of wealth constrains human capital investment, as Becker and Tomes (1986) propose, an increase in wealth should relax budget constraints and help accumulate human capital, such as in the abundant findings of Filmer and Schady (2011), Lovenheim (2011), and Dahl and Lochner (2012). No studies have clearly documented the negative effect of wealth growth on human capital, resulting in the scope for the explanation proposed and examined by our study Another main finding of our study—that the wealth from UHD reduces individual labor supply— supports recent research on the causal relationship between wealth and labor supply. van Huizen (2014), Picchio et al (2017), and Cesarini et al (2017) have provided solid evidence by using large samples from affluent countries (i.e., Sweden and the Netherlands) that windfalls negatively affect labor supply For reasons such as the lack of available data, researchers have focused less on the wealth effects in China, where household wealth has been increasing significantly (Xie and Jin, 2015) and the labor shortage is becoming a prominent problem (Cui et al, 2018).
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