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«40 Abstract This paper assesses the various elements that enter into the relation between the expansion of higher education and income inequality ...»

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This paper assesses the various elements that enter into the relation between the

expansion of higher education and income inequality amongst urban and rural areas in

China since 1999. Education plays a significant role in earnings and economic growth. A

large amount of research exists that analyzes the impact of education expansion on

economic growth and issues of income inequality in China. However, very little of it

links education expansion with income inequality. As background, this paper first describes the extent of the higher educational transformation in addition to income inequality as a trend in China since the early 1990s. This is followed by a discussion of the impact of education expansion on education inequality between urban and rural areas.

Education inequality, including quality and quantity aspects, caused mainly by unequal education investment, has been a factor in increased income inequality. It has had a big impact on the employment rate and rate of education return in China. Moreover, rapid education expansion significantly increases the amount of labour supply, which in turn causes the rate of unemployment to increase. Lastly, different rates of return to different education levels will be argued to be a factor causing greater income inequality.

1. Introduction In the past decade, China has witnessed expansion in its tertiary education.

Reflecting China’s commitment to continued growth as set out in recent five-year plans, the incentive behind this policy is to accumulate human capital for future development.

Besides maintaining China’s continuing growth process, the 11th five-year plan also aims to create a “harmonious society” which would be a result of decreasing income inequality. The theoretical underpinning of education expansion includes human capital theory, which argues that through education, individuals acquire competencies and skills that increase their productivity and lead to a higher wage. It is logical that with economic growth the standard of living will increase and income inequality will decrease. China’s income inequality, however, has continued to increase throughout the past few decades, and in 2000 China had one of the most unequal income distributions in the world.

Education inequality will be assessed first in this paper. The distribution of education is a factor that affects income inequality. Education expansion increases the average years of schooling per individual; however, the relationship between average education level and educational inequality is not clear. Ram’s (1990) research from 94 countries finds a curvilinear relationship between average education level and educational inequality. The relationship shows a reverse U-shape (parabolic curve) with average education level shown on the horizontal axis and educational inequality on the vertical axis. The turning

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point is around 6.8 years of average education level, when educational inequality reaches its highest point. In China’s case, where the increase in average education level is caused mainly by an expansion in higher education, the education inequality is likely to increase.

While increasing the average years of schooling per person tends to reduce income inequality, distributing the increase unequally will exacerbate income inequality.

Education inequality caused by expanding higher education will eventually affect wages and employment. Education is becoming more important in determining an individual’s choice of occupation and their decision whether to join the public or private sector within developing countries. Occupation choice and total working time are also important for income gain. Less educated workers generally have to work longer hours in order to make a living, which decreases the income gap. More educated workers, on the other hand, have a higher participation rate and are more likely to enter the state-owned or monopoly sector, which provides a higher wage, thus enlarging income inequality.

Rate of education return is a measurement of income based on education attainment. The average rate of education return in China continues to rise, with higher education levels having a higher return rate (Lai 1997). The return gap between primary school and a university degree also has been growing in recent years, which will lead to greater income inequality. On the other hand, if the low-income group’s rate of return to education were higher, education expansion could contribute to narrowing the income gap.

Rapid education expansion generates a significant increase in labour supply, causing an unemployment rate increase. Even though higher productivity from higher competency and skills leads to higher wages, it is not driven solely by the supply side of the labour market. The unemployment rate of college graduates has been rising during recent years in China, with only two thirds of college graduates able to find a job upon completion. If the increased economic growth is not able to absorb the sharp increase in the number of highly educated individuals, the trend of rising income inequality could be reversed. If skill-biased technological change in China shifts labour demand from non-skilled to skilled workers, the result will likely be rising income inequality.

In order to measure the impact of educational level on income, this paper considers annual earnings as the measurement of income. Annual earnings are monthly wages and subsidies multiplied by working months, plus yearly bonus. Lifetime earnings have not been considered here because they may include components which are not affected by education, such as housing-related income. There are two measures of the urban-rural income gap, the ratio of urban to rural mean incomes (relative gap) and the difference between urban and rural mean incomes (absolute gap). Another well-known measurement of income inequality is the Gini coefficient. A large ratio, difference, or Gini coefficient implies larger urban-rural income inequality.

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2. Background Higher education expansion since 1999 In December 1998, Dr. Min Tang from the Asian Development Bank submitted a proposal entitled “Some Thoughts on Revitalizing the Chinese Economy: Double Enrollment in Higher Education” to the Central Government. The Central Government has two strategic development goals for higher education: expand the scale of higher education, and establish world-class universities. There have been several dimensions of higher educational transformation since 1999.

The enrollment rate of tertiary education in China before 1999 was stable. In 1998, the total number of graduates from tertiary education was 830,000; the number jumped to 3,068,000 in 2005. The higher education gross enrollment rate reached 24.2% in 2009 from 9.8% in 1998. (Figure 1). It had been consistently below 7% before 1995 (Levin and Xu 2005). The number of enrollments for new students and total students has risen faster.

It essentially quintupled between 1998 and 2005 (Li et al. 2011) (Figure 2).

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Increasing educational attainment is now focused on rural areas. As shown in Figure 3, the gap in admission rate to population between urban and rural areas has been decreasing gradually from 1996 to 2005. Moreover, “the proportion of urban students in total admissions decreased …, while the proportion of rural students in total admission increased… Admission rates for the population in rural areas have risen much faster than admission rates for the urban population.” (Li et al. 2011, 521) The increasing accessibility to higher education for rural students may be a contributing factor in the decreasing income inequality.

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Another feature of higher education in China is that it is shifting from elite education to mass education. During the period of dramatic expansion, 2-year programs, which have lower admission requirements and are considered to have lower teaching quality, have grown much more quickly than 4-year degree programs. In 1998, there were 2.235 million students (65.6%) registered in 4-year programs and 1.174 million in 2-year programs. By 2008 there were 9.168 million students registered in 2-year programs and

11.422 million in 4-year programs, which accounted for 54.6% of the total. (Figure 4).

Private higher education also plays a role in the massive expansion of education. After the Law for Promoting Minban (people-run) Education was passed in 2003, the number of private higher education institutions increased from 20 in 1997 to 278 in 2008. These universities have lower admission requirements and receive little public funding; they depend heavily on tuition (Wang and Liu 2011). If total enrollment increases result from the higher participation in 2-year programs or private higher education, the benefits of individual investment in human capital may be offset by high student fees. This will not help to reduce income inequality. In addition, there will be concerns about the quality of higher education.

Figure 4. Source: Wang and Liu 2011, 216

As the expansion continues, it aims to promote elite universities and consolidate other universities in order to increase education quality. The second strategic development goal, which focuses on the establishment of world-class universities, requires a change from quantity to quality orientation in education. Elite universities are the top ten ranked universities in China. They receive the most education funding and are given priority in selecting students through national entrance exams. The focus of establishing world-class universities has been to strengthen and elevate these top universities. Moreover, in order to improve their ranking, several universities in major cities have amalgamated. For example, Beijing Medical University was incorporated into Peking University in 2000 and renamed the Faculty of Health Science, Peking University, and in 1999, the Central

Western Undergraduate Economics Review 2012

Arts and Design College was incorporated into Tsinghua University and renamed the Faculty of Arts of Design, Tsinghua University (Li et al. 2011). In this way, many universities have been able to increase the number of undergraduate students by 30% a year. If the expansion lets rural students who have the ability enter top universities to receive their higher education, income inequality will be likely to fall.

Trend of income inequality

Income inequality in China has continued rising to relatively high levels for approximately 30 years. China’s Gini coefficient increased from 0.382 in 1988 to 0.452 in 1995 (Zhao, Li, and Riskin 1999), from 0.37 in 1991 to 0.44 in 2000 (Benjamin et al.

2008), and from 0.41 in 1993 to 0.47 in 2004 (Asia Development Bank). The Gini coefficient is also higher in rural than in urban areas, 0.34 for urban and 0.38 for rural.

Moreover, according to Li and Luo’s calculation, the ratio of urban to rural income in China in the mid 1980s was 1.8, and it has increased to 3.3-3.4 in 2007 (Li and Luo 2007). It is worth mentioning that China’s urban-rural gap is not uniform regionally. The relative gap is highest in the West, as compared to the Center and East. However, this paper is focusing on China as a whole.

Existing literature on education expansion and income inequality

There are several research papers regarding the impact of education expansion on income inequality. Most of them find that fairness in education expansion and education distribution helps to reduce income inequality. Lai (1997) and Bai (2004) demonstrate that there is an inverted U-curve relationship between education expansion and income inequality in China. In its early stages, education expansion contributes to greater income inequality; in later stages, income inequality decreases (Lai 1997). China’s education expansion is on the left side of the inverse U-curve. As average schooling years increase, so does income inequality (Bai 2004). Moreover, Yu and Lu (2009) test the impact of higher education expansion on income distribution based on the 1996 data from 29 provinces. They use GNP per capital, higher education scale, population above 6-yearsold obtaining higher education, and Gini coefficient. The result indicates a positive influence on fairness of income distribution; the more the investment in higher education, the more equitable the income distribution is. However, these studies do not focus on urban-rural income inequality; Bai and Lai’s conclusions are drawn from all levels of education, not from just higher education expansion.

3. Impact of higher education expansion on education inequality

Although higher education expansion increases college accessibility for high school graduates, another important question is whether such expansion benefits all high school graduates from urban and rural areas. In China, the gap in education level between urban and rural areas has a negative impact on income inequality. With the increase of market-oriented reform, education plays a more and more important role and becomes a significant factor in income inequality (Zhang 2006). The impact of higher education

Western Undergraduate Economics Review 2012

expansion on education inequality has been debated for decades. Since the beginning of the 20th century, education has undergone different levels of expansion. The expectation is that the influence of social background, gender, and race on education accessibility may decrease as education expands. However, many experiences show that family social and economic status has a stable impact on education accessibility inequality. Some economists believe that when higher education only focuses on elite universities, relatively small numbers of students have opportunities to pursue higher education. The upper middle class usually monopolizes such opportunities. Therefore, when China’s higher education expansion shifts to mass higher education, it increases opportunities for the lower class. Nevertheless, research indicates that at different stages of education expansion, education accessibility inequality will display different characteristics.

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