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BENEFITS OF CHINA’S EXPANSION OF HIGHER EDUCATION: New evidence of the boost to productivity, especially in high-skill industries

The surge in the size of China’s college-educated workforce since the early 2000s is helping Chinese firms to catch up with the technology frontier, to increase productivity and to expand production. That is the central finding of research by Yi Che and Lei Zhang, published in the September 2018 issue of the Economic Journal.

Their study finds that it is manufacturing firms in more human capital-intensive industries that have experienced the biggest productivity benefits from the sharp increase in the number of high-skilled graduates from four years after the dramatic expansion in higher education in China in 1999.

But the researchers also find that foreign firms in China have had considerably bigger productivity gains than domestic privately owned firms in the human capital-intensive industries. This suggests that domestic firms face constraints in taking advantage of the increased supply of skilled workers.

One important reason that firms in developing countries have lower productivity than firms in developed countries is a lack of skilled labour. This may lead to the use of technologies that are not at the frontier or a mismatch between relatively low-skilled workers and frontier technologies that are primarily invented in developed countries with an abundance of skilled labour. Technological progress since the 1970s is particularly skill-biased and demands more skilled labour for its effective use.

The Chinese government launched a dramatic higher education expansion programme in 1999, when 1.56 million new students were admitted into college, an unprecedented increase of 44% over 1998.

College admissions grew annually by more than 40% again in 2000, and by about 20% in each of the next five years. After ten years, the gross college enrolment rate among 18-22 year-olds had increased from 9.8% in 1998 to 24.2% in 2009. All but a very few college students graduate at the scheduled time, so increased admissions translate into increased graduates in about four years.

The surge in the size of the college-educated labour force in the early 2000s is improving the productivity of all firms. But it is particularly benefiting firms in industries that experience more skill-biased technological change and employ relatively more skilled labour (human capital-intensive industries).

Focusing on the manufacturing sector, the researchers compare the productivity increase of firms in more human capital-intensive industries with that of firms in less human capital-intensive industries before and after the sharp increase in the college-educated labour force – that is, the period 1998-2002 and the period 2003-2007.

The estimates in the new study suggest that between the periods 1998-2002 and 2003-2007, the extra productivity growth due to the higher education expansion programme accounts for 5.8% of the overall productivity growth of the manufacturing sector. This is non-trivial given that the employment of college-educated workers in this sector increased by a modest 6.2%.

Relative to 1998-2002, firms in more human capital-intensive industries show more adoption of frontier technologies after 2003 as exhibited by their larger increases in imports of advanced capital goods, capital intensity and R&D expenditure. As a result, they are producing relatively more new products and they have become relatively more important in the manufacturing sector, with larger increases in value added, output and capital stock.

These increases have been accompanied by changes in the composition of employment: between 1995 and 2004, there was a relatively larger increase in the employment of more educated workers, as well as workers with the job titles of engineer and technician, in more human capital-intensive industries.

But the relative gains in productivity by domestic privately owned firms in more human capital-intensive industries are less than 20% of those of foreign firms: while the productivity of foreign firms in more human capital-intensive industries grew relatively faster in the entire post-2003 period, the productivity gains of domestic private firms vanished towards the end of the 2003-2007 period.

This pattern suggests the existence of severe constraints faced by domestic private firms in taking advantage of the increased supply of skilled workers. It also suggests that improvements in credit, taxation and labour market policies could play important roles in overcoming those constraints.

Human Capital, Technology Adoption and Firm Performance: Impacts of China’s Higher Education Expansion in the Late 1990s’ by Yi Che and Lei Zhang is published in the September 2018 issue of the Economic Journal.