This paper empirically estimates the returns to education using twins data that the authors collected from urban China. Our ordinary least-squares estimate shows that one year of schooling increases an individual¡¦s earnings by 8.4 percent. However, once we use the within-twin-pair fixed effects model, the return is reduced to 2.7 percent, which suggests that much of the estimated returns to education in China that have been found in previous studies are due to omitted ability or the family effect. This finding suggests that well-educated people are faring well in China mainly because of their superior ability or family background advantages, rather than because of knowledge that they acquired at school. We further investigate why the true return is low and the omitted ability bias high, and find evidence that it may be a consequence of the distinct education system in China, which is highly selective and exam oriented. More specifically, we find that high school education mainly serves as a mechanism to select college students, and has zero returns in terms of earnings. In contrast, both vocational school education and college education have a large return that is comparable to that found in rich Western countries.
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Paper provided by Chinese University of Hong Kong, Department of Economics in its series Discussion Papers with number
00013.
Length: Date of creation: Sep 2005 Date of revision: Handle: RePEc:chk:cuhkdc:00013
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Find related papers by JEL classification: J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials O15 - Economic Development, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration P20 - Economic Systems - - Socialist Systems and Transition Economies - - - General
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