Educating like China

By Federica Coelli, Difei Ouyang, Weidi Yuan and Yuan Zi

This paper shows that human capital accumulation can accelerate structural transformation without accelerating growth. We study China’s 1999 higher education expansion, a large, rapid, and largely unanticipated increase in college graduates. We find that more exposed prefectures experienced larger increases in the skilled-labor share and shifted employment and value added from agriculture toward services. The reallocation extended to low-skilled workers. Consumer services absorbed most of the increase in employment, while producer services accounted for a disproportionate share of high-skilled employment growth. Yet more-exposed prefectures did not grow faster. A four-sector model rationalizes these patterns, showing how greater skill supply can generate broad-based servitization, but also a Baumol-type growth penalty when labor reallocates toward slower-growing sectors. Our findings highlight that the payoff to higher education depends not only on how much skill it creates, but also on whether the resulting structural transformation directs resources toward the economy’s engines of productivity growth.