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 Li Junsen 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 Li Pak Wai Liu Ning Ma Junsen Zhang The Chinese University of Hong Kong

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

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

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

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 countries/regions may be similar

29. Economic Returns to Communist Party Membership: Evidence from Urban Chinese Twins Hongbin Li Pak Wai Liu Junsen Zhang Ning Ma The Chinese University of Hong Kong

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

35. 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

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

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. Potential biases of within-twin-pair estimates • 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. Potential biases of within-twin-pair estimates • 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