Unobserved Human Capital And Income Gap In China

Since the economic and political reform in 1978,China's economy has growing rapidly in the past 30 years,while the income gap between regions and rural-urban has also been increasing.Focus on the regional income gap are from the researchers,who find that human capital cannot explain the gap,but the latest evidence deny the findings,suggesting the importance of unobserved human capital.Theory of human capital has been updated by Nobel laureate,Prof.James Heckman form Univ.of Chicago.His works are focused on the core of human capital,and he believes that cognitive and noncognitive skills,health are what human capital is,and the relationship between the three are substitute and complementary,while the formations of human between the three components encompass self-productivity and cross-productivity.Education is just one path to accumulate the skills and health,not the ultimate goal.It proves from another angle that education itself cannot measure human capital while unobserved human capital matters.Combining Heckman's works,it is widely found that after incorporating unobserved human capital,the contribution of human capital to regional or country development and income gap increased substantially.If unobserved human capital can increase with education extension,then the target can be focused on increasing the education period and polish the compulsory education.Research found that years of education is irrelevant with education quality,which means that observed and unobserved human capital may be independent in explaining economic development and the role of unobserved human capital could be significant.This paper is built around the concept of unobserved human capital.In the 3rd and 4th chapters,it tries to incorporate the unobserved human capital concept to explaining regional and rural-urban income inequality in China,and define the unobserved human capital as part of human capital(knowledge and skills)that cannot be explained by education and experience.Limited by available data,no direct measurements of skills or health can be used directly to measure unobserved human capital,thus it requires a way to build the measurement of unobserved human capital.There are normally two ways adopted in international research,first is to compare standard test scores of students,such as reading or math tests,second is comparing earnings of immigrants from different regions or countries.It is believed that the second way is more suitable for the case in China.In this paper,the exact way of getting unobserved human capital is utilizing a case that migrant from all regions work in the same labor market,which intuitively help to control unobservable market characters that affect earning,so comparing earnings of migrants could derive the formula of unobserved human capital.After that,plugging the unobservable into the Development Accounting framework,it calculates the contributions of physical capital,observed human capital,unobserved human capital,and TFP,to regional inequality in China from a cross-sectional view.In the 5th chapter,after addressing the important role of unobserved human capital in explaining regional development and inequality,it answers the question what unobserved human capital is and how does it generate.Still building on Heckman's skill human capital theory,evidence has shown that relationship between cognitive skill,noncognitive skill and health encompass self-and cross-productivity.However,attentions are more paid on cognitive skill and the causal relationship from noncognitive skill to health,while rarely discuss how health affect noncognitive skill.This paper will focus on this specific channel,and present empirical evidence of that.The paper includes by seven parts.Chapter 1 is introduction part,Chapter 2 is literature review,and the rest are briefly introduced as follows:The third chapter finds that human capital contributes much more than relevant evidence on the same topic,above 80%;unobserved human capital's contribution reaches 45% and 66% for WS-ES and MD-ES gaps respectively;physical capital stock has already lower the regional inequality;migrants are positively selected,while those from west or middle regions are more positively selected than those from east region;the quality measures of human capital can explain 15% to 25% of unobserved human capital's contribution.The fourth chapter also finds that human capital can explain rural-urban gap,16% to 40% in total and is robust to parameters selection;observed human capital contributes 8%-21%;unobserved human capital's contribution is parallel with that of observed human capital,5%-15%;within each region,unobserved human capital's roles are between 3%-22%,suggesting heterogeneity;physical capital is the most important,contributing 46%-66%,higher than that of human capital;human and physical capital together explains 70%-90% to the rural-urban gap,leaving small room for TFP;through a test,the discrimination hypothesis is not severe for the elder migrants.The fifth chapter,through the cross-sectional and time series perspectives,builds the index of unobserved human capital in China.From the cross-sectional view,in 2007,based on the J-F life time approach,the distribution of unobserved human capital index indicates that east region's is the highest,in urban west region's is higher than that of middle region,in rural west's is lower than middle's;within each region,urban's unobservable is higher than rural's;unobserved human capital increase with education;based on migrant's income method,east region's advantage in unobservable is less significant,potentially due to the wage growth rate difference.From time series view,in J-F method,the trend is increasing for regional gap in unobservable,expect that for rural in middle and east regions.The unobserved human capital urban gap between regions speed up,while that for rural increase at a lower pace,which indicates that in the future the regional gap would be determined by the urban rather that the rural.Regional gap in unobserved human capital is larger than the gap in average years of education but larger than GDP per capital gap.The sixth chapter addresses the formation of unobserved human capital,utilizing the panel model,and finds that health affect noncognitive skills through two ways,first is children with more illness would have higher noncognitive skills,while those overweight would show lower noncognitive skills in the next period.Healthy behavior also significantly affect behavioral problems,and the children who check dentist regularly would lower their behavior problems in the future.Specifically,the more illness the less anxiety problem,but overweight would elevate anxiety problem,dentist behavior would lower the behavioral problems in antisocial and peer conflict.The seventh chapter summarizes and make relevant policy recommendations.The article brings forth the following innovations:Firstly,it used the micro data to explain the macro phenomenon,which is comparing earnings workers from different region to calculate the unobserved human capital,and by structuring the development accounting model,get the contribution of factors and its productivity in explaining regional income gap.Secondly,different from the Growth Accounting method that search variations from time,this paper utilize the Development Accounting method and seeks variations within one country,and decompose China's regional income gap.Thirdly,under the constraint of micro data,the paper comes up with a novel way of estimating unobserved human capital in China,and joins the international discussion of human capital's contribution.Lastly,it tests the reverse relationship between noncognitive skills and health/health behavior,and explores the skilled based human capital formation theory.However,this article faces the following shortcomings:Firstly,in the regional inequality part,it assumes that unobserved human capital in rural represents the region's total unobserved human capital,due to lacking of urban migrants sample.Secondly,in the rural-urban inequality part,there is no efficient way to fully correct the discrimination hypothesis.Thirdly,no available data of noncognitive skills in China can be used to test how children's noncognitive skill formation path in China.