Differences between returns to education in Urban and rural China and its evolution from 1989 to 2019

Abstract

The income gap between urban and rural residents has long been a predicament for China. The differences between returns to education in urban and rural China are one of the important factors affecting the income gap. Using a combination of data from CHNS, CHIP, CGSS, CFPS, CHFS, and CSS, the differences in returns to education and its evolution in China from 1989 to 2019 were estimated. Results show that returns to education in urban China have been consistently higher than that in rural China. Returns to education in urban China show a trend of progressive increase, then a rapid rise, before turning into a slow decline and gradually leveling off; returns to education in rural China exhibit a slowly increasing trend before gradually leveling off; the differences between returns to education in urban and rural China show an evolution of first growing larger, then smaller, before gradually leveling off. The spouse’s education was considered the instrumental variable of individuals’ education. The robustness test was done with an estimation through a two-stage least squares (2SLS) method. Results indicate that the empirical conclusion has good robustness. The evolution of returns to education in China was explained in terms of the marketization of labor forces, the relative supply and demand of labor forces, the reform of the household registration system, and the evolution of the quality of education.