Does higher education expansion enhance productivity?

This paper studies the impact of the higher education expansion in China on average labor productivity. I argue that in an economy such as China’s, where allocation distortions widely exist, educational policy affects labor productivity not only through its effect on human capital stock, but also through its effect on human capital allocation across sectors. Thus, its impact could be limited if misallocation becomes more severe following the policy. I build a two-sector general equilibrium model with policy distortions favoring the state sector and overlapping generations of heterogeneous households making educational and occupational choices. Quantitative results show that, given policy distortions, China’s higher education expansion had a small but negative effect on its average labor productivity (–2.5%). The crowding out of productive capital caused by magnified resource misallocation plays a key role in driving down productivity. However, the productivity effect of the educational policy would turn positive if distortions were further reduced or removed.