Frictions In The Labor And Education Markets,Between-Group Inequality And Economic Growth In China

This thesis examines the macroeconomic effects of frictions in China’s labor and education markets.Chapters 2 to 4 constitute the main body of this thesis.Chapters 2 to 4 are closely related and have different focuses.The average wage of urban women/rural men/rural women is much lower than that of urban men in China.What explains huge wage gaps between different hukou and gender groups in China? Chapter 2 uses an overlapping generation model with human capital investment and occupational choices to quantify how much wage gaps between these groups can be imputed to two types of talent allocation frictions,labor market discrimination and human capital accumulation barriers.In the model,an individual’s decisions on human capital investment and occupational choice are affected by talents of her/his own,occupational preferences and human capital endowments her/his group possesses,and barriers to human capital accumulation and labor market discrimination suffered by her/his group.In shaping occupational preferences,social norms and government policies play an important role.Talent allocation frictions affect the average wage of a group by affecting its occupation distribution and human capital investment in each occupation.Under a series of standardization and identification assumptions,we calibrate the labor market discrimination and human capital accumulation barriers faced by urban women(rural men/women)and group-specific occupational preferences in each occupation.Through a series of counterfactual exercises,we can answer the questions of interest.We find that the two talent allocation frictions faced by urban women(rural women)can explain four-fifths(three-fifths)of the wage gap between them and urban men in2013 and that labor market discrimination and barriers to human capital accumulation both played important roles in explaining their wage gap.The two talent allocation frictions faced by rural men can explain about one-third of the wage gap between them and urban men in 2013,the obstacle to human capital accumulation suffered by them played a leading role in explaining their wage gap,and(negative)labor market discrimination faced by them narrowed the wage gap.Rural men’s high occupational preference for farmers alone can explain a large part of their wage gap.To show how severe the output cost resulting from talent allocation frictions is,we also calculate the counterfactual economic growth if these frictions were eliminated.We find that if there were no talent allocation frictions since 1995,the economic growth rate between 1995 and2013 would have been about half a percentage point higher.The main findings in Chapter 2 have important policy implications for narrowing the income gap between groups of different genders and hukou and boosting China’s economic growth.The college admission in China is placed-based and,more specifically,province-based.The key feature of this admission mechanism is that a high school graduate’s chances of going to college depend not only on her/his human capital level at graduation but also on the province where she/he takes the college entrance examination.The place-based college admission mechanism can be seen as a specific friction in China’s education market.How efficient is the current province-based or place-based college admission mechanism in allocating the total college admission quota across provinces? What provinces have too many(few)admissions or too high(low)admission rates? While these questions have received widespread attention,they have not been seriously studied.Chapter 3 constructs a spatial general equilibrium model with multiple stages of education and multiple regions,calibrates the model with province-level data,and answers these questions through a counterfactual experiment.The cohort we examined took the college entrance examination between 1998 and 2003.The national college admission mechanism is chosen as the reference for answering these questions because it is both a mechanism that naturally is considered in contrast to the place-based admission mechanism and a mechanism that maximizes output for a given total college admission quota.Under the national college admission mechanism,high school graduates nationwide are ranked according to their scores(human capital)at graduation,and only those whose ranking is lower than or equal to the total college admission quota are admitted to colleges.If the college admission system had been changed from province-based to national,the output would have increased(by about 0.1%).Many provinces have large differences in the admission rates or the number of admissions under the two admission systems.Hence,the province-based admission system is not a good approximation of the national admission system.In contrast with the national admission mechanism,under the province-based admission mechanism,i.e.,the admission mechanism in practice,the provinces with too many(few)admissions or too high(low)admission rates include both economically developed and underdeveloped provinces.Some economically underdeveloped provinces may have higher admission rates than some economically developed provinces under the national college admission system,which can be justified by the large disparity in high school enrollment rates between these provinces.The main findings in Chapter 3 have important policy implications for the reform of China’s college admission system.Chapter 4 uses the model built in Chapter 3 to quantify the output gains of some education reforms or policies that remove or mitigate frictions or distortions in China’s education market.The richness of the model in Chapter 3 allows us to do so.We have the following main findings.First,the expansion of higher education has greatly boosted China’s GDP.Higher education expansion between 1999 and 2003 increased GDP by 3.57%.The quality of higher education did not improve significantly during the period of higher education expansion.Second,granting migrant students the same educational opportunities as local students can significantly increase China’s output and education-driven migrants.If migrant students and local students had the same educational opportunities,GDP would have increased by 0.29%,and migrant students by 28.40%.If mobility costs were further halved,GDP would have increased by 0.39%,and migrant students by 230.77%.Third,a local hukou is necessary for students to attend high schools and take college entrance examinations in the province where they moved to,but easier access to local hukou alone cannot increase the number of migrant students or the level of output as educational opportunities differed so much between migrant and local students and mobility costs were too large.Forth,there were huge disparities in the quality of basic education across provinces,and equalizing education quality across provinces could have great benefits.As a result of equalizing education quality across provinces at the compulsory education stage,GDP would have increased by 0.47%.Fifth,the high school enrollment rate of the cohort we examined was so low that increasing it could effectively boost China’s output.A 20% drop in the cost of attending high school in each province would have raised the overall high school enrollment rate from 20% to 38%and would have increased GDP by 2.40%.Sixth,during the period we examined,China’s basic education,especially compulsory education,was of poor quality.As a result,an improvement in the quality of basic education could have great benefits.A 20% increase in the education expenditure at the compulsory education stage in each province would have increased GDP by 4.11%.The main findings in Chapter 4 have important policy implications for China’s education reforms.