Presentation at the HLEG thematic workshop on "Intra-generational and Inter-generational Sustainability", 22-23 September 2014, Rome, Italy, http://oe.cd/StrategicForum2014

1. China's Human Capital Stock
- An Estimation Based on ROWA
Jingyuan Cui & Yang Yao
The China Center for Economic Research
&
The National School of Development
Peking University
October 27, 2014 1

2. The existing methods
• The cost-based approach
– Comparable with the measure of physical capital
– Difficult to get data
– Does not reflect the quality of output
2014/10/27 2

3. The existing methods
• The life-time income approach
– Rely on many assumptions
• The market is efficient to properly remunerate human capital
• A proper estimation of a country’s growth rate
• A proper estimation of the discount factor
– Cause underestimation of human capital stocks in developing
countries
• A fresh university graduate in China earns one sixth as much as his
American counterpart
– Tautological when it is used to explain economic performance
• Because it is constructed by taking into account future growth
2014/10/27 3

4. A simple new method
• The rate-of-return weighted average (ROWA) of
education
– The RoR of education is estimated for each age group
– Take one age group as the reference (16 years old in this study)
– The weight of an age group = its RoR/RoR of the reference
group
– The weight*average schooling years of the same age group is
the RoR weighted average schooling years of that age group
– The ROWA of the population is the population share-weighted
average of the RoR weighted average schooling years of each
age group
2014/10/27 4

5. ROWA has several advantages
• It is simple
• Does not rely on significant assumptions
• Takes care of the quality of education output
• Independent of country size
• Easy for international comparison
2014/10/27 5

6. • Two data sources:
Data
– The 2010 wave of CFPS (China Family Panel Studies,
www.iSSS.org.cn)
• A US PSID type of survey
• Provides individual-level education and earning data
– The Sixth Census (2010)
• Provides average education and size of age cohorts
• Estimating the RoR
– The urban working sample of the CFPS is used to estimate the
age-specific RoR
– The estimated RoR is applied to the rural sample
– Aggregation is based on the census data
2014/10/27 6

7. Years of schooling
12
10
8
6
4
2
0
Years of Schooling by Age
15 25 35 45 55 65
Schooling
Age
Population
Male
Female
2014/10/27 7

8. Estimating the RoR
Dependent variable=ln(monthly Income)
Variables Coeffcients
Male
0.262***
（0.060）
Work Experience
0.097***
（0.030）
Square of Work Experience
-0.002***
（0.001）
Years of schooling
0.086***
（0.030）
Years of schooling * Work Experience
0.004
（0.003）
Years of schooling * Work Experience^2
-0.000***
（0.000）
Years of schooling * Work Experience^3
0.000***
（0.000）
2014/10/27 8

9. RoR by Age and Gender
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
RoR by Age and Gender
15 25 35 45 55 65
RoR
Age
Population
Male
Female
2014/10/27 9

10. RoR-adjusted Schooling by Age and Gender
14
12
10
8
6
4
2
0
Actual and RoR-adjusted Schooling Years
15 25 35 45 55 65
Schooling Years
Age
RoR-adjusted
Schooling
Years
2014/10/27 10

11. The ROWA
• 16 years old equivalent
• For the population of 16-65 years old: 9.12 years
• Male: 9.40 years
• Female: 8.83 years
2014/10/27 11

12. Labor force participation rates are low
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
2014/10/27 12
Source: The Sixth Census (2010).
0%
16 21 26 31 36 41 46 51 56 61 66 71
All
Male
Female

13. Shares of utilized human capital
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
15 20 25 30 35 40 45 50 55 60 65
Share of utilized human capital
AGE
Population
Male
Female
2014/10/27 13

14. Large potentials
• Only 78% of human capital of the group of 23-65 years
old are utilized
• If women’s labor force participation rates are raised to
men’s levels of the same ages, utilized human capital
will increase by 9.26%.
• Implications for China’s long-term growth
– Higher levels of human capital of young workers will substitute
for the loss of labor due to negative demographic trends;
– Raising the retirement ages and other measures to boost labor
force participation has large potentials
2014/10/27 14