The role of education in wage determination in China’s rural industrial sector

The TVP labour market has undergone a great change during the economic reform period. Starting from a fully controlled recruitment system, more employees obtained employment through a more market oriented mechanism. This study applies human capital theory to investigate the impact of this institutional change on TVP wage determination. It is found that education as one of most important human capital variables plays an important role on the wage determination of those who obtained jobs through own effort (the market group), while it is insignificant for those who were assigned to the jobs (the non-market group). The further analysis suggests that although education plays different role on the market and non-market groups wage determination they are both productivity orientated. And the reason for this might be that the underlying technological processes of the work undertaken by the market group is higher than that for the non-market group. Does education, therefore, plays no role for the non-market group? The paper employs a logit model to prove that education is an important determinant for both the market and the non-market groups' occupational attainment. This suggests the following general picture: for the market group, there is a direct relationship between education, occupation and wage determination; for the non-market group this relationship is somewhat indirect. The rate of return to education is more likely to be reflected by non-wage benefit. China's economic reform which started in the late 1970s aimed to transform a Stalin styled centrally planned economy into a market oriented one. During the reform period a new sector, the rural township village and private enterprises (the TVP sector), has been emerged and remarkably developed. It is regarded as the most market oriented sector in the Chinese non-agricultural economy and has progressively become more so along with the process of economic reform. It can be seen as a sector which is in a period of transformation moving from a planned economy to a market economy.