Trade openness and human capital allocation: From a perspective of occupational choice between public sector and private sector

Abstract

This paper investigates the impacts of trade openness on the allocation of human capital between public sector and private sector. Using a matched dataset of the 1% survey of China's population in 2005 and other city-level data, we find that individuals who reside in cities with higher degrees of trade openness are less likely to work in public sector, and this effect increases with educational attainment. We then employ a difference-in-differences model and a triple differences model based on the trade liberalization of China to alleviate endogeneity concerns, and finally come to a same conclusion. Further analysis reveals that trade openness triggers human capital reallocation by ameliorating business environment and raising the returns on human capital that is allocated to private sector.