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Human Capital Estimates in China: New Panel Data on China by Provinces 1985-2010

Haizheng LiSchool of EconomicsGeorgia Institute of TechnologyEmail: haizheng.li@econ.gatech.edu

Qinyi LiuSchool of Economics and Trade Hunan University

Bo LiChina Center for Human Capital and Labor Market ResearchCentral University of Finance and Economics

Barbara FraumeniMuskie School of Public ServiceUniversity of Southern Maine

Xiaobei ZhangSchool of EconomicsZhejiang University of Finance and Economics

China Center for Human Capital and Labor Market Research1

Human capitalThe knowledge, skills, competencies and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being--OECD, 2001Importance of Human CapitalA central determinant of economic growthSignificant contributions to 30 years economic growth in ChinaEnhances the ability in Developing technological innovations Adapting and implementing technologies developedReduce poverty and inequality

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Human capitalImportance of Human Capital MeasurementTrace the distribution and dynamics of human capital Aid empirical studies and policy analysis Promote the creation of human capital satellite account

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Human capital measurementChallengesThe uniquecharacteristics make it difficultto estimate itsvaluePartial measurements like education are commonly used Lack of data existing method cannot be applied to China Arduous work for datacollection, processing andcalculation, especially at provincial level Empirical researches desire panel data of human capital Panel data of comprehensive measures of human capital at a state or province level are lacking for most countries including China

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Research team and sponsors Research Team (starting in 2008)China Center for Human Capital and Labor Market Research (CHLR) special-term faculty, full-time faculty, doctoral and Masters student, and staff

SponsorsNational Natural Science Foundation of ChinaCentral University of Finance and Economics

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MethodologyJorgenson-Fraumeni Lifetime Income-based Approach Include all aspects of human capital services measured by market value

Widely used in measuring a nations total human capital stockArgentina (Coremberg, 2010), Australia (Wei, 2007, 2008), Canada (Gu and Wong, 2009), India (Gundimeda et al., 2007), New Zealand (Le, Gibson, and Oxley, 2005), Norway (Liu and Greaker, 2009), Sweden (Ahlroth, Bjorkland, and Forslund, 1997), United Kingdom (OMahony and Stevens, 2004 and Jones and Chirpanhura, 2010), and the United States (Christian, 2010)

The OECD human capital consortium OECD, 2010; Mira and Liu, 2010; Liu, 2011

Chinas national level human capitalLi et al., 2010; Li, Liang et al., 2013

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MethodologyJorgenson-Fraumeni lifetime income-based approachCalculate human capital stock for each individual as the estimated present value of expected future lifetime earningsBackward recursive estimation beginning with the oldest covered ageDivide life cycle into five stagesRetirement, Work-only, Work-school, School-only, Pre-school

Modifications Incorporate the Mincer model (National level)Expand Mincer model to include macro-variables (Provincial level)Derive total human capital stock separated by urban and rural in estimationAdjustment for cross-province comparison with a living cost adjustment index7China Center for Human Capital and Labor Market Research

Augmented Mincer model Lack of data in China use the Mincer model to estimate earningsExtended model for earnings in provincesln(inc)= 0 + 1 ln(Avwage)+ 2 Sch+ 3 Sch Avgdp+ 4 Sch Ratio+ 5 Exp+ 6 Exp2 +uln(inc): the logarithm of earningsSch: years of schoolingExp: years of work experienceAvwage: average wage of a provinceAvgdp: provincial GDP per capitaRatio: provincial primary industry employment proportion of the total labor forceu: random error

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Augmented Mincer model Extended modelAvwage reflects the income gap among provinces Reflect provincial differences in earnings of those with no schooling and no labor-market experience

Avgdp and Ratio capture the provincial economic development stage and labor market structureReturn to schooling is affected by the development stage and labor market structure (Li 2003, Zhang et al., 2005, and Yang, 2005)

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DataImputing population by cohortPopulation data into 4-dimensionsNational Censuses (1982, 1990, 2000 and 2010)1% sample of national population survey (1987, 1995 and 2005)Provincial Statistical Yearbooks (1982-2010)Age distribution & Enrollment ratesThe China Health and Nutrition Survey (CHNS 1989, 1991, 1993, 1997 and 2000) The Chinese Household Income Project (CHIP 1995)The China Education Statistical Yearbook (2003-2010)10China Center for Human Capital and Labor Market Research

DataEstimating Mincer parametersMicro:Annual Urban Household Survey (UHS 1986-1997)China Health and Nutrition Survey (CHNS 1989, 1991, 1993, 1997, 2000, 2004, 2006 and 2009)Chinese Household Income Project (CHIP 1988, 1995, 1999, 2002 and 2007) Chinese Family Panel Studies (CFPS 2009) China Household Finance Survey (CHFS 2010)Macro: provincial statistical yearbooks (1982-2010)

Growth rate & Employment rateProvincial statistical yearbooks (1982-2010)

Discount rate4.58% --used by Jorgenson and Fraumeni (1992a) and the OECD consortium (OECD 2010)11China Center for Human Capital and Labor Market Research

Results--Human Capital panel dataProvide provincial human capital panel data22 provinces/cities Guangdong, Jiangsu, Shandong, Henan, Hubei, Hunan, Anhui, Shanghai, Liaoning, Beijing, Guizhou, Gansu, Tianjin, Heilongjiang, Zhejiang, Guangxi, Shaanxi, Hainan, Jiangxi, Jilin, Chongqing, Sichuan

1985-2010cover most of the reform era

Total human capital(HC), Per capita HC, Labor force human capital(LFHC), Average LFHCUrban/rural, Education, Age, Gender

12China Center for Human Capital and Labor Market ResearchDescription of data12

Total human capital(HC)Human capital reservepopulation aged 0-15 (have not entered the labor market)full-time students aged 16+ (not in the labor force)Human capital in usenon-retired population aged 16+ and in the labor force

The average annual growth rate

lower than the growth rate of the Chinese economy much faster in the latter periodSimilar change happens at urban/rural, education, age, gender131985-20101985-19941995-20106.4%1.2%9.3%China Center for Human Capital and Labor Market Research

Table 1 Descriptive Statistics for Human Capital14Sample MeanVariable 1985199520052010Total human capital(Billion RMB)1,6021,7224,7238,177Of: Urban 6267653,1275,954Rural1,0231,0031,6732,328Male9871,0853,0405,354Female6156381,6832,822Age 0-15 (human capital reserve)8608762,1603,273Age 16-59 (labor force human capital including students)7428462,5634,903China Center for Human Capital and Labor Market Research

Total human capital(HC) Urban-rural Urban increase by 8.5 times; rural 1.3 times from 1985 to 2010 Urban/rural 60-76% in 1985-1995 2.6 times in 2010 Fast urbanization in China Increasing educational attainment gap

Gender Annual growth: male 6.6% ; female 6.1%Male/total: 61.6% in 1985 65.5% in 2010Rising gender ratio of male for Chinas one-child policyRising gender inequality in educational attainment15China Center for Human Capital and Labor Market Research

Total human capital(HC)Age (Figure 1)Human capital reserve (aged 0-15) : Its ratio in total: 54% in 198540% in 2010Its population share in total: 39% in 198523% in 2010

Labor force age human capital(aged 16-59, including students): Its ratio in total: 46% in 198560% in 2010Its population share in total: 61% in 1985 77% in 2010

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Total human capital(HC)Age (Figure 2)Labor force human capital(16-59, excluding students) The share in total declined since 2000, increase starts at 2005Full-time students(aged 16-59) in school increaseIts share in labor force: grows from 2.9% in 1985 to 6.9% in 2010Due to expanded education opportunities since 1999

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Labor force human capital(LFHC)

Trend:Average annual growth in 1985-2010

LFHC grows faster than total HC (fewer young people)

20%HCLFHCLabor forceTotal6.46.81.6Urban8.89.24.3Rural3.44.30.0China Center for Human Capital and Labor Market Research

Labor force human capital(LFHC)Education(Figure 4)Human capital share in education:Illiterate and primary: declined rapidly Junior school remains the largest, and started to decline since 2006Senior: flatCollege or aboveThe highest increase (close to 20% annual growth) Increased from 1.7% in 1985 to 26.3% in 2010much higher than its population share, 12.3% in 2010 A rising return to college education documented by Zhang et al. (2005)

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Figure 4 Education Share in Labor Force Human Capital (LFHC)22

China Center for Human Capital and Labor Market ResearchShould change nominal to real to ensure consistency22

Per capita human capital (PCHC)Measure of the intensity of human capitalCompare the annual average growth rates

Since 1995 they grew at a similar annual growth rate

Average annual growth rates of population 1.2% in 1985-1994; 0.6% in 1995-2010 much slower than the growth of HC

HC growth is not driven solely by population growth

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China Center for Human Capital and Labor Market ResearchDivide into two pages23

Table 2 Descriptive Statistics for Per Capita Human Capital24Sample MeanVariable 1985199520052010Per capita human capital (Thousand RMB)4946121202Of: Urban 7365165267Rural403677116Male5855148247Female403690150Age 0-15 (human capital reserve)6971221382Age 0 (Average lifelong income for new-born)7678247407China Center for Human Capital and Labor Market Research

Per capita human capital (PCHC) (Table 2)Urban/ruralGap enlargedRural/Urban: 54% in 198543% in 2010

Education (Figure 3)Average years of schooling 5.5 years in 1985 8.8 years in 2010

Gender Female/male: 69% in 1985 61% in 2010

Age 0-15Average annual growth PCHC: 6.6%; Population: -1.5%

25China Center for Human Capital and Labor Market ResearchChange average year of schooling25

Top 5 Provinces for Human Capital in 201027Total human capital (Billion RMB)Total population1Guangdong21,974Guangdong2Jiangsu21,029Henan3Shandong18,386Shandong4Zhejiang15,335Sichuan5Henan13,888JiangsuPer capita human capital (Thousand RMB)Per capita GDP1Shanghai378Shanghai2Beijing345Beijing3Zhejiang337Tianjin4Tianjin332Liaoning5Jiangsu329HeilongjiangChina Center for Human Capital and Labor Market Research

Average labor force human capital(ALFHC)Urban/rural:Urban: RMB 167 thousand; Rural: RMB 90 thousand in 2010Average annual growth

Since 1995, urban ALFHC has grown much faster than rural Education gap between urban and rural areas Higher labor quality and thus higher productivity in urban areas, if the age structure in urban and rural areas were identical urban/rural gap will continue to rise.28%1985-20101985-19941995-2010Urban4.9-1.08.2Rural4.3-0.26.8China Center for Human Capital and Labor Market Research

Top 5 Provinces for Labor Force Human Capital in 201029Labor force human capital (Billion RMB)1Guangdong12,2202Jiangsu8,5523Zhejiang7,1224Shandong6,4985Henan5,796Average labor force human capital(Thousand RMB)1Shanghai2632Beijing2553Tianjin2224Zhejiang2065Jiangsu184China Center for Human Capital and Labor Market ResearchDivide into separate parts29

Human capital as a measure of social development--beyond GDP measuresbeyond Gross Domestic Product measure of economic and social progress--Stiglitz Commission report

Expected average lifetime income for newborns rises rapidly

It Annual growth rate of 6.7% faster than PCHC (5.6%)

Provincial difference:

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China Center for Human Capital and Labor Market Research

Human capital and physical capitalLFHC/physical capitalDecreases rapidly across time12 times in 1985 5 times in 2010

Possible reason:High physical capital investment in ChinaIncreased at an average annual growth of 18.9% during 1992-1997

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Illustration of Data Applications34China Center for Human Capital and Labor Market Research34

Table 4 Production function estimation35Var.DefinitionPooled OLSFELaborHuman capitalLaborHuman capitallnKlog(physical capital)0.647***0.449***0.603***0.533***(0.007)(0.012)(0.015)(0.037)lnLlog(labor)0.366***0.185(0.021)(0.183)lnHlog(labor force human capital)0.551***0.221***(0.023)(0.063)Cons-5.376***-13.224***-2.058-4.623***(0.348)(0.583)(3.056)(1.532)Obs.546546546546R20.9540.9660.9810.986China Center for Human Capital and Labor Market ResearchShould change nominal to real to ensure consistency35

Illustration of Data ApplicationsPooled OLS (Table 4)LFHC has much higher output elasticity than laborWhen human capital is includedSmaller elasticity of physical capital, even smaller than that for human capitalConstant returns to scale

Fixed EffectsLFHC still has higher elasticity than that of laborElasticity of labor and LHFC become much smaller than OLSDecreasing returns to scale

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Illustration of Data Application37China Center for Human Capital and Labor Market Research

Table 5Sources of Chinas Economic Growth using Solow Growth Accounting

381986-20101986-2010Growth rate (% per year)Output10.2910.29Physical capital16.4816.48Labor 1.64TFP (with labor)3.76Labor force human capital7.03TFP (with labor force human capital)0.14Contribution to GDP growth (%)Physical capital53.3253.32Labor10.69TFP (with labor)35.99Labor force human capital45.87TFP (with labor force human capital)0.81China Center for Human Capital and Labor Market ResearchShould change nominal to real to ensure consistency38

Illustration of Data ApplicationContributions to economic growth (Table 5) With traditional labor input Physical capital accounts for 53.3% of growthEconomic growth in China has been mainly driven by physical capital Labor input: 10.7% TFP: 36%

With human capital inputLFHC: 45.9% TFP: 0.8%Consistent with studies that use two-step procedure to estimate how human capital affect TFP growth

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SummaryThe data provide very rich information in studying Chinas human capital A comprehensive picture of Chinas human capital distribution and dynamics

Demonstrations of applications of the new data Estimating a production functionConducting the growth decomposition exercise using the dataCompared the results with the traditional estimation based on labor inputs

The new panel data on Chinas provincial human capital are quite reliable; and should be a valuable new resource for related studies and policy analysis40China Center for Human Capital and Labor Market ResearchQuestions?41