Free Entry Ticket to the Labour Market: The Long-Run Effects of Free Compulsory Education on Labour Supply

The 2006 free compulsory education reform in rural China represents a pioneering initiative that paved the way for China’s rural development. However, there is a notable lack of evaluations assessing its long-term impacts. This paper examines the long-run effects of free compulsory education on labour supply, exploiting cross-province variations in the implementation of this reform using nationally representative data in China. Using a cohort Difference-in-Differences (DID) specification, we find that exposure to free compulsory education significantly increases the probability of employment and reduces the probability of unemployment. For the employed population, they shift from the agricultural sector to the tertiary sector, engage more in formal employment and less in farming, informal employment, and entrepreneurship. These results are attributed to improvements in educational outcomes (evidenced by higher high school graduation probabilities), cognitive abilities (evidenced by higher vocabulary and mathematics test scores), and health outcomes (evidenced by better physical and mental health). This reform narrows the gender gap in employment, particularly formal employment with signed labour contracts, as evidence shows that this reform has improved women’s human capital more than men’s. We examine how free compulsory educational reforms shape long-term labour supply and human capital, offering actionable insights for policymakers across developing countries.