Monday, March 08, 2010

The Overeducated Chinese Young Person?

In 1976, Richard Freeman's book The Overeducated American was published. In a nutshell he argued that the returns to U.S college education were declining. Here is an old review by two prominent economists. With the benefit of hindsight, it appears that he was wrong. The returns to skill have increased over time in the U.S.

History repeats itself. Now the New York Times is arguing that the same dynamic is playing out in China in the year 2010. What is going on?

I was once a labor economist so permit me to offer some conjectures on how to reduce unemployment among the skilled;

1. More Chinese young skilled should enter self employment. We know that to
start your own firm requires capital. If skilled young people are liquidity constrained and can't post collateral then they will have trouble starting their own firms. The government could start a program to take an equity share in companies (irony of a Communist Party as Venture capitalist!)

2. Real wage inequality -- given how high home prices are in the big cities (such as Shanghai and Beijing), workers require very high nominal wages to work in those cities. Such high wages discourage employers from hiring. The government should encourage some job clusters to move to low land rent cities and this would set off an agglomeration in those cities.

3. I do not know what are the firing rules in China. Can firms fire at will or is there effective "tenure"? In a new economy where worker skills and job match quality must be discovered it makes sense to a have a labor market where firms can dismiss at will. If firms know they can fire workers, they will be more likely to hire workers to see if they are a good fit within the organization.

4. Are all college degrees valuable in China in terms of human development and problem solving? Have their graduates received a serious education that resembles a UCLA or Harvard? Or have they been memorizing a lot of stuff? Has China suffered from the brain drain and needs more of their best graduates who have gone abroad to return home? The NY Times has written about superstars returning home.

5. Don't forget the "system of cities". In the United States, if Los Angeles offers a UCLA graduate few opportunities then she can move to Dallas or Cleveland. For years, China had restricted migration. To arbitrage regional differences in job opportunities requires information. Does China have "middle men" playing an active role broadcasting where there is local job demand for the skilled? Demand tends to attract supply! Zheng, Liu and I explore these themes in this 2010 RSUE paper .

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