1 education, rustication and communist party membership: what pays? what does not pay? hongbin li...
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1
Education, Rustication and Communist Party Membership: What Pays? What Does Not Pay?
Hongbin LiJunsen Zhang
(Others)
The Chinese University of Hong Kong
2
First twins data from China
The first socioeconomic twins data collected by Junsen Zhang and NBS from China, also first in Asia
MZ (monozygotic) twins are genetically identical twins DZ (fraternal) twins are non-identical twins
A series of papers based on this dataset My talk focuses on 3-4 papers regarding the returns to
human/political capital in China—Do the following factors matter for earnings?
Education The Communist Party membership Forced rustication during Cultural Revolution (if time permits) Spousal education (if time permits)
3
Does Education Pay in Urban China?Estimating Returns to Education Using Twins
Hongbin LiPak Wai Liu
Ning MaJunsen Zhang
The Chinese University of Hong Kong
5
Returns to education in China
Recently, economists have started to estimate the return to education using Chinese data
Early studies find rather low returns: 2-4%(Byron and Manaloto, 1990; Meng and Kidd, 1997)
Economists, including Heckman, believe that the return should increase with economic transition Indeed, recent data show larger returns: 7-10%(Heckman and Li, 2004; Zhang et al., 2005)
6
Two problems with this literature
None has established causality Economists have ignored a very important
aspect: the Chinese education system
7
Our contributions
Estimate the causal effect of education using twins data we collected
Investigate how the Chinese education system may have affected the return to education
8
Empirical specification: OLS One equation: log(earnings) of person i
y: log of monthly earnings Edu: years of schooling X: observable family variables Z: observable individual variables (age, gender, job
tenure) : unobservable determinants of earnings
Hypothesis: Edu has a positive effect on earnings Difficult to identify this effect because of
endogeneity
)1(21 iiiiii ZEduXy
9
Empirical specification:Within-twin-pair estimations Twins: log(earnings) of twins in family i
Taking the within-twin difference, we have
Note that the unobservables, has been removed
)3(
)2(
222212
121111
iiiiii
iiiiii
ZEduXy
ZEduXy
)4()()( 2122121121 iiiiiiii ZZEduEduyy
10
Empirical specification: GLS Following Ashenfelter and Krueger (1994)
measures the selection effect, relating family effect to education
Assume correlations between the family effect and education of each twin are the same
measures the return to education measures the selection effect
)7(')()()(
)6(')()()(
22221212
12121111
iiiiiii
iiiiiii
ZEduEduEduXy
ZEduEduEduXy
)5(2121 iiiiiii XZZEduEdu
1
11
First survey of twins in China Data were collected by Junsen Zhang in collaboration
with the National Bureau of Statistics in 5 cities, 2002 Adult twins between 18-65
Sampling rather representative: twins identified through various channels such as advertising, neighborhood notices, public security bureau etc.
Questionnaires filled by face-to-face interviews We got 810 pairs of twins with complete information for
our study Also surveyed non-twins for comparison
12
Data summary
Generally, twins sample comparable to other sample Tables-education.pdf
There is a large within-twin-pair variation of education
48% of the twins having within-twin difference in education
24% having a difference of 2 years or more
13
Results: returns to education
OLS estimate: 8.4% Tables-education.pdf Within-twin-pair FE/GLS estimates: 2.7% Our results differ from twins studies of
other countries—Tables-education.pdf True return in China is lower Selection effect in China is larger
14
Potential biases of within-twin-pair estimates (1)
Within-twin-pair difference may not completely remove the omitted ability bias: Within-twin-pair difference in ability may still be correlated with the error term
However, within-twin-pair estimates may be less biased than OLS estimates, and thus establish an upper bound We examine this by checking the correlations between
education and other ability variables According to Ashenfelter and Rouse (1998), we have
confidence if within-twin correlations are smaller than between-family correlationsTables-education.pdf
Indeed, within-twin-pair estimates establish an upper bound for the true returns to education, which is 2.7% in our case
15
Potential biases of within-twin-pair estimates (2)
Measurement error: people may miss-report education Causes the return to be underestimated
Correction: use the IV method designed by Ashenfelter and Krueger (1994) Using cross-reported education as an IV Tables-education.pdf
17
The Chinese education system Nine years compulsory schooling: primary and junior high
school After which,
Either vocational schools (no further schooling, normally 3 years) or high school (3 years)
Only high school students can go to college Entrance to college is extremely competitive (college
entrance exams; June 7, 8, 9) 73% in our sample have high school, vocational school or above
degree 13% have college degree
23
The Chinese education system: High school
Because of the competitive nature, high school education is totally exam-oriented
Finish all new things in 1.5 years, and spend the rest preparing for the college entrance exams
Students need to solve tons of problems, and take lots of mock exams in 3 years
Sometimes go to exam-training schools Schools and teachers are rewarded solely based on the success rate
in the college entrance exams Curriculum of high school is fixed by the Ministry of
Education Students are divided into arts and science major in high
school Arts students have no physics, chemistry or biology; have easy math Science students have no history or geography
24
The Chinese education system: Vocational schools and college
Have freedom in choosing their own curricula
Students can choose their own classes, especially in colleges
More importantly, these are the final-stage educations for most, and thus no more pressure for exams
25
Education system affects returns to education and selection effect
High school is exam-oriented: the knowledge and skill have no use for the real world work
The returns to vocational school and college education to be higher than high school
The selection effect is large: only the most able ones can get into colleges
26
What levels of education pay?
Tables-education.pdf Return to high school is zero
High school only serves as a way of selection Return to each year of vocational school:
7.3% Return to each year of college: 10%
27
Conclusions We measure the causal effect of education on earnings
using Chinese urban twins We find
The true return is low, selectivity is high However, the low return is caused by the zero return of high
school education The return to none-exam-oriented education such as college is
comparable to western countries (10%) We show that “twins studies” are important
Previous twins studies were challenged because the OLS estimates and within-twin estimates are similar
That is because, they study rich western countries, where education opportunity is more equal and high education is less selective
28
Policy implications
College entrance exam is still needed, given the huge population eager to get education
However, policies can improve the overall efficiency of education expenditure Cutting high school by one year, and use the
saved resources for other education levels China may not be unique, other Asian count
ries/regions may be similar
29
Economic Returns to Communist Party Membership: Evidence from Urban Chinese Twins
Hongbin LiPak Wai Liu
Junsen ZhangNing Ma
The Chinese University of Hong Kong
30
Value of political connections
Recently, growing interest in measuring the value of political connections/status Political connections are valuable for firms and
individuals in both developed and developing countries (Roberts, 1990; Fisman, 2001; Agrawal and Knoeber, 2001; Johnson and Mitton, 2003; Faccio, 2004; Bertrand et al., 2004; Khwaja and Mian, 2004)
31
The case of China
The value of the Communist Party membership High-paying jobs and promotion in state-related
institutions such as governments, banks, universities, SOEs Using connections to facilitate business operations Most works by sociologists and political scientists (Szeleni,
1987; Nee, 1989, 1991, 1996; Rona-Tas, 1994; Walder, 1996; Morduch and Sicular, 2000; Liu, 2003).
Many find that Party membership has a positive value for businesses and personal incomes
Most interpret this as political rents
32
None has established causality Selection bias
Party members are not randomly chosen from the population
They could be those who have greater ability or more advantageous family background
Party membership in a regression may pick up the effect of unobserved human capital variables (genetic or family effect)
33
Our objectives Empirically estimate the impact of the Party membership
on earnings by using Chinese twins data we collected Establish causality--Identical twins are genetically identical and
have a similar family background, a within-twin-pair (FE) estimation can remove unobserved ability or family background
How much of the Party effect is due to selection? And, how much is due to political connections?
Any difference in terms of the selection and true Party effect across generations?
Contributions First study to establish causality in the literature of political
connections Results will be important to understand China and the Party
34
Empirical specification: OLS One equation: log(earnings) of person i
y: log of monthly earnings P: the Communist Party membership dummy X: observable family variables Z: observable individual variables (age, gender, job
tenure, education) : unobservable determinants of earnings
Hypothesis: P has a positive effect on earnings Difficult to identify this effect because of
endogeneity
)1(21 iiiiii ZPXy
35
Empirical specification:Within-twin-pair estimations Twins: log(earnings) of twins in family i
Taking the within-twin difference, we have
Note that the unobservables, has been removed
)3(
)2(
222212
121111
iiiiii
iiiiii
ZPXy
ZPXy
)4()()( 2122121121 iiiiiiii ZZPPyy
36
Empirical specification: GLS Following Ashenfelter and Krueger (1994)
measures the selection effect, relating family effect to Party status
measures the party effect measures the selection effect
)7(')()()(
)6(')()()(
22221212
12121111
iiiiiii
iiiiiii
ZPPPXy
ZPPPXy
)5(2121 iiiiiii XZZPP
1
37
First survey of twins in China We collected the data in collaboration with the
National Bureau of Statistics in 5 cities, 2002 Adult twins between 18-65
Sampling rather representative: twins identified through various channels such as advertising, neighborhood notices, public security bureau etc.
Questionnaires filled by face-to-face interviews We got 725 pairs of twins with complete information
for our study Also surveyed non-twins for comparison
38
Data summary Generally, twins sample comparable to other
sample Tables-party.pdf There is a large within-twin-pair variation of
Party membership Neither twin is member: 68% Either one is member: 22% Both are members: 10%
Also a large within-twin-pair variation of education
39
Results: OLS using whole sample
Party members enjoy a premium of 12.4% Tables-party.pdf
Education has a large effect: 6.3% per year of schooling
Other variables Men had 18.9% higher earnings Age has a non-linear effect
40
Results: OLS using MZ twins
Results from twins sample are rather similar to those of the whole sample The coefficient on the Party membership
changes a bit, but still large and significant Same is true for education
Tables-party.pdf
41
Results: within-twin-pair FE & GLS
The Party premium becomes zero: The OLS estimate of the Party premium is due to selection effect: omitted ability or family effect
GLS results are similar to FE results Tables-party.pdf
44
Why Party members are of high ability? Selection process is long and strict
Takes 3-10 years to join Reviews by Party and non-Party
members Quality requirements of the Party
Politically loyalty Good performance Good interpersonal skills Persistence
45
Old vs. young generations Economic transition may affect the Party premium
Weakening of communism ideology Plan to market, entry of non-state firms
Affects both Party selection and premium Premium becomes lower over time: non-state firms
may not value the Party membership Selection mechanism becomes weaker over time:
joining the Party becomes less rewarding Young generation should enjoy less premium, and
able young people are less likely to join the Party
46
Old vs. young generations Historical reason
The Cultural Revolution (1966-76) interrupted the education and career of old generation (aged 34-52 in our sample)
The political fever makes high ability people join the Party
Education cannot fully pick up the human capital/ability for the old generation
Party membership may be a better indicator of human capital/ability for the old generation
47
Old vs. young generations: results OLS Tables-party.pdf
The interaction term is positive: the Party premium is larger for older people
FE The effect is gone
Together, it means that the larger Party premium of the old generation is due to selection: able people in the old generation is more likely to join the Party, due to Ideology, monetary incentives Cultural revolution
48
Potential biases of within-twin-pair estimates
Within-twin-pair difference may not completely remove the omitted ability bias: Within-twin-pair difference in ability may still be correlated with the error term
However, within-twin-pair estimates may be less biased then OLS estimates, and thus establish an upper bound We examine this by checking the correlations between Party
membership and other ability variables According to Ashenfelter and Rouse (1998), we have
confidence if within-twin correlations are smaller than between-family correlations Tables-party.pdf
Indeed, within-twin-pair estimates establish an upper bound for the true Party effect, which is zero in our case
49
Potential biases of within-twin-pair estimates
Reverse causality Those who make more (perform better) are
recruited by the Party If this is true, then we should observe a
positive correlation The fact that we find zero correlation
suggests that reverse causality is not important here
50
Potential biases of within-twin-pair estimates
Within-family externality The party membership of one twin may directly affects
the earnings of the other twin FE estimates in this case will cancel the own effect and
the external effect out—leading to an underestimation of the party effect
We directly test the external effect Non-twin sibling vs. twins Tables-party.pdf Results show that externality is not important
51
Conclusions Party members enjoy an earnings premium, but the
whole premium is due to their high ability The finding of this paper suggests that China’s
political system can select high-ability people to be leaders
The high quality of Party members may partially explain why they can quickly come up and effectively implement
market-based reforms and why they are able to constantly adapt to evolving
environment
52
Guilt and the Allocation of Resources: Sophie’s Choice and its Aftermath during the Cultural Revolution
Hongbin Li
Mark Rosenzweig (Yale)
Junsen Zhang
53
Sophie’s Choice Sophie's Choice was a dilemma allegedly
presented to some Jewish mothers during the Holocaust
Nazi soldiers would force a mother to choose one of her children to be murdered
If the mother refused to choose, all of herchildren were slain
A book about the psychology of these mothers
54
Cultural Revolution The Chinese economy was collapsing in the
1960s, due to Wrong domestic and foreign policies Disastrous Great Leap Forward Withdraw of Soviet technicians
The collapse of the economy could lead to the collapse of the political system and Mao Zedong’s power
Chairman Mao started the 10-year long “Great Proletarian Cultural Revolution” in 1966
To divert attention from his mistakes To fight against his opponents in the Communist
Party
56
Red Guards Mao shut down all schools and mobilized
the high school students to fight against his opponents
These teenagers were called the “Red Guards”
Main functions Crush those persons in authority or
intellectuals who are taking the capitalist road
Transform education and culture that do not fit socialism
They are violent
62
“Up to the mountains, down to the villages” After a few months, Mao started to feel the
danger of the Red Guards Soon, people started to “follow” Mao’s order—
Red Guards become less useful Red Guards lost directions, and they turned into
turmoil and disorder Economically
Very high unemployment rate among urban youth
Low agricultural production, lack of food Mao came up with a “great” idea to
discharge the Red Guards, and to solve unemployment
63
Forced rustication in China
High school graduates were force to go to the countryside Harsh living environments; hard farm work; not
allowed to go home Rules of send-down differ across areas: not all
have to go
70
Return to cities
Mao died in 1976—Cultural Revolution ended
In 1978, send-down movement ended The Party started to arranged the sent-down
youth to return to the cities
71
Research questions
What was the effect of the rustication on economic outcomes: earnings, schooling, employment, health and marriage?
Who was sent? (Sophie’s Choice) From good or bad family backgrounds? The weaker or stronger child in a family?
Did the parents feel guilty about the sent child?
72
Guilt Guilt is a feeling we get when our actions
harms someone else We all experience it
It affects our socioeconomic behaviors Feeling guilty creates incentives in teamwork
(Kandel and Lazear, 1992) Guilt is a lubricant of social system (Arrow,
1974) An alternative to law to channel our behavior
(Kaplow and Shavell, 2001; Shavell, 2002) All these are theories; no empirical work
73
Empirical issues
How people react to guilt? Do they compensate the one being
harmed to reduce the psychic cost?
We answer these questions by studying the Cultural Revolution
74
Twins strategy
If one twin was sent down, the other was not (or they were sent down for different years), then we can do within-twin estimations to identify the causal effect
Comparing OLS to FE estimate using MZ twins can identify the family selection rule
Comparing the FE estimate using MZ twins to the FE estimate using DZ twins can identify the intrafamily selection rule
75
Within-twin variation in send-down
51 percent of people in affected cohorts (aged 41-55) were sent down
There is large within-twin variation in Send-down Send-down yearsTables-Rustication.pdf
76
Results
Send-down years (rustication) have a large positive return in terms of earnings—larger than that of formal education Tables-Rustication.pdf
Children of disadvantageous families stayed in the countryside longer (FE estimate is larger than OLS estimate)
77
Results The weaker child of a family stayed in
the countryside longer Tables-Rustication.pdf
Logic FE estimate for DZ twins is smaller than FE
estimate of MZ twins So, FE estimate using DZ twins is biased
downward So, within-twin difference in send-down
years (of non-identical twins) picks up some unobservables (ability) that are negatively correlated with earnings
78
Results: Other outcomes Send-down years have either a positive
effect or no effect (FE-MZ) Tables-Rustication.pdf
Children of disadvantageous families stayed in the countryside longer (FE estimate is larger than OLS estimate)
The weaker child of a family stayed in the countryside longer (FE-MZ estimate is larger than FE-DZ estimate)
79
Parental transfer: altruism vs. guilt Parental transfer to children depends on
the send-down years Altruism
Compensating: transfer more to the weaker child
Reinforcing: more to the stronger child Guilt
Transfer more to the child who stayed in the countryside longer
80
Empirical test: altruism vs. guilt Transfer: dependent variables
Wedding-time transfer Current transfer
Independent variables Altruism: wage Guilt: picked up by “send-down years”
Unobservables at the family-level Twins strategy
81
Altruism and guilt: results Tables-Rustication.pdf FE estimates using MZ twins
Wage has a negative coefficient—likely a compensating effect
Send-down years have positive effect on transfer--evidence of guilt
FE estimates using MZ twins larger than those using DZ twins Parents would have transferred less to the
send-down child if no one were sent down Meaning: sent-down child was the
unfavorite one
82
Altruism vs. guilt: results Which effect dominates? Estimate the reduced form (not
controlling wage directly) Send down has two effects
Altruism: negative (send-down experience increases wage)
Guilt: positive Results: guilt motive dominates
83
Our contributions Cultural Revolution is one of the most dramatic political movements in
modern history—largest rural-to-urban migration almost no study by economists, especially its socioeconomic impacts
First empirical study of Guilt The results are important to understand human capital and intrafamily
choice/investment decisions In studying human capital, economists have focused on formal education,
but human capital can form through many channels Military service (De Tray, 1982), training (Heckman et al., 1999), learning by
doing (Foster and Rosenzweig, 1995), learning from family members (Huang, Li, Liu and Zhang, 2006)
Hard to examine other channels: no clear definition; do not occur at a large scale; do not occur randomly
Send-down is a social experiment It was in a large scale, allowing us to use the “twins strategy”—becoming a
natural experiment
84
Why Does Spousal Education Matter for Earnings? Assortative Mating or Cross-productivity
Chong Huang
Hongbin Li
Pakwai Liu
Junsen Zhang
The Chinese University of Hong Kong
85
Positive effect of spousal education
Economists have long been interested in the positive relationship between spousal education and earnings
Two hypotheses are put forward to interpret such a positive effect (Becker, 1973 and 1974): Cross-productivity Assortative mating
86
Hypothesis 1
Cross-productivity Spousal education helps an individual to
accumulate human capital and increase earnings For example: sharing ideas in the family Evidence supporting cross-productivity (Benham,
1974; Scully, 1979; Kenny, 1983; Wong, 1986)
87
Hypothesis 2
Assortative mating Individuals who marry well-educated people are of
high ability or good family background Positive mating v.s. negative mating (Weiss, 1994) Empirical evidence supporting assortative mating
(Welch, 1974; Liu and Zhang, 1999)
88
Our objectives
Empirically distinguish between cross-productivity and the mating effect by using unique Chinese twins data Establish causality Which effect is working for one’s earnings?
Cross-productivity? Assortative mating? Or both?
Gender difference within family If cross-productivity effect works, what is
the channel? Longer hours or better paid?
89
Our contributions
First study to show the existence of cross-productivity and assortative mating effects
Two innovations Use within-twins difference to remove unobservable
ability and family effects Compare the effect of spousal education on current
earnings with that on wedding-time earnings
Results will be important to understand human capital accumulation
90
Empirical specification: OLS
One equation: log(current earnings) of person i
: log of current monthly earnings sedu : the spousal education (Years of schooling) Z : observable individual variables (age, gender, job tenure,
education) : unobservable determinants of earnings
sedu has a positive effect on earnings through both cross-productivity and assortative mating
: the cross-productivity effect, or causal effect : unobservable assorative mating effects, or omitted variables
Endogeneity because is unobserved.
)1(iiiiici ZseduXy cy
91
Empirical specification:Within-twin-pair estimations
Twins: log(earnings) of twins in family i
Taking the within-twin difference, we have
Note that the unobservables, has been removed
)3(
)2(
222
111
2
1
iiiiic
iiiiic
ZseduXy
ZseduXy
i
i
)4()()()( 21212121 iiiiiici
ci ZZseduseduyy
92
Results: OLS using whole sample
One more year of spousal education will increase earnings by 5.1% (Tables-spousal edu.pdf)
Reduced by half, when own education included There is some positive assortative mating effect in
terms of education
93
Results: OLS using MZ twins
Results from twins sample are rather similar to those of the whole sample The results regarding the spousal education is
7% and significant Same is true for own education
(Tables-spousal edu.pdf)
94
Results: Within-twins FE
The return to spousal education barely changes The OLS estimate of the return to spousal education
supports the cross-productivity effect
Return to own education reduces to zero, because the effect of gene and family background is removed for twins but not for spouses
(Tables-spousal edu.pdf)
95
Remaining mating effect in within-twins estimates
Within-twin-pair difference may not completely remove the assortative mating effect: Within-twin-pair difference in ability may still be correlated with the error term
However, within-twin-pair estimates may be less biased then OLS estimates, and thus establish an upper bound We examine this by checking the correlations between
spousal education and other ability variables According to Ashenfelter and Rouse (1998), we have
confidence if within-twin correlations are smaller than between-family correlations (Tables-spousal edu.pdf)
Indeed, within-twin-pair estimates establish an upper bound for the true return to spousal education.
96
Remaining mating effect in within-twins estimates
Our second innovation is to establish an upper bound for the omitted mating effect by estimating the wedding-time earnings equation
Couples have fewer opportunities to help each other to accumulate human capital before the wedding, so the cross-productivity effect should be relatively unimportant at that time
The within-twins estimated effect of spousal education on wedding-time earnings can establish an upper bound for the omitted mating effect
97
Remaining mating effect in within-twins estimates
Establish an upper bound for the omitted mating effect by estimating the wedding-time earnings equation
where ym is individual’s wedding-time earnings.
Return to spousal education at wedding time is zero in OLS and within-twins FE estimations
The whole mating effect can be well controlled for by either observable human capital variables or by taking the within-twins difference. (Tables-spousal edu.pdf)
Existence of cross-productivity effect
)7()()()(
)6(
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iiiimm
imi
iim
iimm
imi
iim
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ZZseduseduyy
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98
Difference between sexes
Cross-productivity effect should be larger from males to females in China
In China, males and females play different roles in the family decision process
Females have the final say about minor spending Males make the final decision for major issues
The results of regressions using the male and female twins sample separately show a difference between sexes
(Tables-spousal edu.pdf)
There are significant cross-productivity effects from males to females but those effects from females to males are insignificant.
99
Longer hours or better paid?
Spousal education may have an effect on monthly earnings through either hourly wage rate or monthly working hours
Human capital accumulation or more time spent on job?
The wife's education has no effect on the hourly wage rate of her husband, while the husband's education has a positive effect on the hourly wage rate of his wife
(Tables-spousal edu.pdf)
100
Longer hours or better paid?
For males’ working hours, within-twins estimate of own education is zero, and that of the spousal education is positive and significant
For females’ working hours, within-twins estimates of both own education and spousal education are zero
101
Implications
Positive relationship between spousal education and earnings is due to both cross-productivity effect and assortative mating effect.
The finding that spousal education has a cross-productivity effect could shed light on our understanding about human capital, marriage and family
One potential channel of the post-school improvement of human capital, that is, learning within marriage
Three implications: A rise in education not only improves one’s own earnings, but also raises
earnings of the spouse Learning beyond normal schooling ages may have good payoffs both
within and outside families The hypothesis, “marriage helps men but hurts women”, might not be true
in urban China
102
Conclusions for the talk What pay in urban China?
High education (college), rustication, husband’s education What do not pay in urban China?
Party membership, high school education Chinese have experienced so many big shocks in the
past half a century Communist Party took over (1949) Great Leap Forward (1958-1961) Cultural Revolution (1966-1976) Agricultural reform (1978-1982) One-child policy (1979-now) Government reforms: forced retirement (1983-1985) Enterprise reform: privatization and unemployment (mid-
1990s) To understand human capital investment and return, as
well as other economic issues in China, we should pay more attention to these institutions