The external returns to education: Evidence from Chinese cities

Following Rauch's (1993) seminal study, there has been a growing interest among economists in estimating human capital externalities at the individual level. In this paper, we provide a first set of estimates of the external returns to education in Chinese cities. We find that the external returns are at least as high as the private returns to education. OLS estimates of the external returns range from a low of 4.9 percent to a high of 6.7 percent. Two-stage least squares estimates indicate that a one-year increase in city average education could increase individual earnings by between 11 percent and 13 percent. We also examine the impact of economic reforms on the external returns to education and find suggestive evidence that economic reforms have raised the external returns to education in Chinese cities.