education, rustication and communist party membership: what pays? what does not pay?

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


4

中国应试教育的代价

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

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ZEduEduEduXy

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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

16

Why

Why is return to education so low in China? Why is the selection effect in China so

large?

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

18

College Entrance Exams: Students

19

College Entrance Exams: Parents

20

College Entrance Exams: Parents

21

College Entrance Exams: Traffic control

22

College Entrance Exams: I would be late!!!

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


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



)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

43

保持中国共产党员的先进性Keep good qualities of Party members

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


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


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

55

Mao on Tian An Men in 1976

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

57

Peking University

58

Counter-revolutionary authorities

59

Counter-revolutionary authorities

60

Destroy old culture

“Teachers set good examples for life”

Confucius and others are down

61

Mao only

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

64

Mobilization

65

Farewell

66

Bye-bye, mommy!

67

Farming

68

Farming

69

After work

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


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



)3(

)2(

222

111

2

1

iiiiic

iiiiic

ZseduXy

ZseduXy

i

i

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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


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


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


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

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iiiimm

imi

iim

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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


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


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

education, rustication and communist party membership: what pays? what does not pay?

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