The Effect of Labor Mobility Restrictions on Human Capital Accumulation in China

In this paper, I study the impact of the Hukou labor mobility restrictions on human capital investment in China. Rural people have stronger incentive to pursue higher education, treating it as means to obtain urban identity and escape from underdeveloped areas. The 1998 Hukou policy reform granted urban Hukou to a specific group automaticly. Using a Regression Discontinuity strategy to fully exploit this policy change, I find the human capital decreased sharply, as measured by high school enrollment and dropout rates, when the mobility restriction is removed. This finding indicates considerable indirect returns to education stemming from the Hukou system in the presence of education-based selective migration, over and above the usual direct pecuniary returns. These results reveal the important role of the Hukou system on encouraging educational investment in China. JEL Classification: J24, J61, O15.