Data shows lifetime financial returns from HE are falling

With a huge rise in school completion and enrolment in higher education over the past few decades, China’s population is better educated than ever before. But a new study on the development of human capital in the country has found that the rise in average years of education no longer necessarily means a continued rise in financial benefits over a lifetime.

The latest annual report on China’s human capital from China’s Central University of Finance and Economics (CUFE) in Beijing draws on data from various universities, China’s National Bureau of Statistics and official social surveys to assess the long-term results of China’s massive expansion in education.

The just-released 2023 report – the 15th in the series – notes that when the fixed-wage system was abandoned in the early 2000s and replaced by market wages “an increasing rate of return to education has been a common phenomenon”, but it pointed to many studies that show the “rate of return to education in urban areas follows a decreasing trend associated with increased enrolment”.

The report’s data shows that from 1985 to 2021 the average years of education for the urban workforce increased from 8.23 years to 11.69 years, while in rural China it increased from 5.47 to 9.24 years.

Due to the general improvement in educational attainment, the return to education in urban areas (the percentage increase in income brought by one year of additional education) is on a downward trend, according to the report.

The return to education for urban men has dropped from a peak of 8.3% in 2008 to 5.7% in 2020. The proportion for urban women dropped from 10% to 6% in the corresponding years. By contrast, returns to education in rural areas remain relatively stable or on an upward trend.

The OECD average for 19 advanced countries for individuals obtaining tertiary education in their late teens or early 20s generates a return of 11% for men and 9% for women over a working life.

A ‘normal’ trend

Li Haizheng, professor of economics at CUFE who led the study, told financial outlet Yicai that diminishing returns on education were normal as the overall level of education rises. He said returns are influenced by the quality of education and shifts in the labour market’s supply and demand.

Human capital refers to the knowledge, skills and abilities that can bring economic benefits to both individuals and to country growth, and is measured using income.

Barbara Fraumeni, a special term professor at CUFE and a research associate at the United States National Bureau of Economic Research, told University World News that from 1985 until around 2005, returns in the form of higher incomes were rising for each additional year of education but then began to fall from then on. This was in part due to the expansion of higher education in China.

Fraumeni, a distinguished US economist, gives her name to the Jorgenson-Fraumeni definition of human capital which looks at income earned over a lifetime, and which was used in the CUFE analysis. She noted that between 1985 and 2011 “for the broad population that is the labour force, the number of years of education completed went from six to 11 years. That’s a huge change.”

China’s gross enrolment ratio, which measures the ratio of those aged 18-23 in higher education compared to the general population, rose from around 2.4% in 1985 to 58.42% in 2020 – comparable to the level in many advanced countries.

“If you were an employer, it used to be that you only could find one person with the level of education that you wanted for your specific task. But now you can find 10 people to pick from, so you don’t have to give them as high a wage as when there was only one person available; so that’s the supply factor,” Fraumeni said.

A transforming economy

“China is transforming from an economy that has primarily depended on, say, factory-type work. Now it has more highly educated people. But does the economy in terms of the jobs that are available keep up with that higher level of education, in terms of having substantially more college students graduating than did in the past?”

“It’s not just China,” Fraumeni said. “There is [also] an issue with the type of job that you could get … [It may not be] commensurate with your abilities, given your education. And that feeds into the economy that is transforming … [Is it] moving away from the factory economy into an economy that relies on individuals with higher levels of education quickly enough?”

Fraumeni noted that wages go up with economic growth which has been strong this century – reaching 8% and above in GDP growth most years since 2000. “Wages go up, but not by as much as they would have when there was only one person available with the level of skills that you want.”

She also noted that over a lifetime, the return on education can decline. “As you get older, your skills decline. Typically, they rise for a period when you’re younger, and then start to decline, except for the category [of skills] that has to do with ability to operate in a more technologically intensive environment.”

Ongoing decline, but at a slower pace

Fraumeni believes the return on education in China over a working life will continue to drop, “although probably the pace of decrease will slow”.

“But it’s still worthwhile, in my opinion, to get a college or a university degree, and it’s becoming more worthwhile to get a graduate degree, a masters degree,” she said.

According to Fraumeni, China needs to ramp up its doctoral programmes in order to improve quality of teaching of university students so that their skills can hold up for longer in a changing economy.

“A quality PhD [holder] is a better teacher. So a quality PhD benefits the country [through] the higher level of training received by students,” said Fraumeni.

The number of academic doctoral programmes at Chinese universities has doubled from 10 years ago, while the number of professional doctoral programmes has increased three-fold, according to a Ministry of Education press briefing on 20 December 2023.

According to Ren Youqun, head of the ministry’s Department of Teacher Education, the number of fresh doctoral graduates reached 75,200 in 2023. Their employment data as of the end of August 2023 shows that fewer than 40% were recruited by colleges and scientific research institutes. More than one-fifth of the fresh PhD holders were hired by enterprises, a proportion which has been increasing for three years in a row.

Ren said that the proportion is still not as high as that in some advanced countries and the demand for doctoral talents in society will continue to increase in the future.

Returns to the economy

The returns on investment in education to the country, in terms of human capital feeding into the economy, will continue, Fraumeni said, despite the current economic slowdown.

“According to data analysis, you’d expect that China’s future is still rosy. It’s not as good as it has been in the past, but they have individuals who have higher human capital. They have higher education, and therefore can do more to stimulate growth in their economy,” she said.

“The declining birth rate is going to slow the increase in human capital, but human capital is still going to be increasing because of the increasing levels of education,” she said.