Education and Allocative Efficiency: Household Income Growth during Rural Reforms in China

This paper studies the contribution of schooling to rural income growth during a period of factor market liberalization in China between 1986-1995. The relaxation of controls on labor mobility permitted farm households to reallocate productive inputs from agriculture to nonagricultural activities. It is hypothesized that education facilitates this adjustment. Panel data from the Sichuan province suggest that schooling enhanced the ability of farmers to devote more labor and capital to nonfarm production, given the evidence that less than optimum levels of these inputs were allocated to nonagricultural uses. During the transition period, the expansion of rural industries accounted for 42 percent of total income growth.