The effects of foreign product demand-labor transfer nexus on human capital investment in China

Over the past two decades, China has witnessed a significant shift in its labor force, with a substantial transfer of workers from the agricultural sector to the non-agricultural sector. This transition, driven largely by increasing foreign product demand (FPD), has profound implications for human capital investment. The non-agricultural sector demands higher-skilled labor, creating an incentive for individuals to invest in education and skill development. Simultaneously, higher incomes in the non-agricultural sector increase the capacity of individuals and families to invest in human capital. This study investigates the complex relationship between FPD-induced labor transfer and human capital investment, considering its impact on gender equality and intergenerational inequality. The research aims to bridge the gap in the existing literature by explicitly examining the mediating role of labor transfer in the FPD-human capital investment nexus. Understanding this nexus is crucial for policy makers seeking to promote economic growth, reduce inequality, and enhance human capital accumulation in China. The study uses a unique dataset comprising approximately 73,000 individuals across China's 31 provinces, providing a comprehensive and nationally representative sample to minimize regional bias.

Existing literature explores the impact of trade openness on human capital investment through three primary channels: skill premium effects, income effects, and competitiveness effects. Skill premium effects posit that changes in labor demand across skill levels (due to trade) affect the returns to education and skill acquisition. Income effects suggest that higher incomes resulting from trade openness influence individuals' ability and willingness to invest in human capital. Competitiveness effects highlight how trade-induced competition might stimulate human capital investment to enhance productivity and competitiveness. Studies have yielded mixed results, with some showing a positive relationship between trade openness and human capital investment, while others find no significant effect or even a negative impact. The lack of consensus underscores the complexity of this relationship, highlighting the importance of investigating the mechanism through which trade affects human capital. This study distinguishes itself by focusing specifically on FPD and the mediating role of labor transfer, offering a nuanced understanding beyond simply examining trade openness.

The study employs a two-stage least squares (2SLS) estimation with instrumental variables to address potential endogeneity issues. The research uses a FPD-LT model, a theoretical framework based on cost-benefit analysis. First, the relationship between FPD (measured as the ratio of exports to GDP) and labor transfer (LT, measured as the change in the non-agricultural employment rate) is examined. Then, the impact of LT on human capital investment is analyzed. Human capital investment is proxied by years of education for adults and educational expenditure for children. The model controls for various factors, including time fixed effects and province fixed effects. One-period lagged FPD is employed as an instrumental variable for LT, given its presumed influence on labor demand without directly impacting individuals' educational choices. Data is drawn from the China Household Income Project Survey (CHIPS) and the China Household Finance Survey (CFPS) for micro-level data, complemented by macro-level provincial data from the National Bureau of Statistics of China. The sample includes roughly 73,000 individuals from multiple years. The authors employ ordinary least squares (OLS) and weighted least squares (WLS) to address heteroskedasticity in the data. Robust standard errors are used to ensure reliable estimates. Heterogeneity analyses examine the impact on individuals based on gender and educational background.

The empirical analysis reveals several key findings. First, a strong positive correlation is observed between FPD and LT from the agricultural to the non-agricultural sector. This supports the hypothesis that increased FPD leads to a reallocation of labor. Second, labor transfer is shown to have a positive impact on adult human capital investment, measured by years of education. This effect is stronger for females, indicating that LT might contribute to reducing gender inequality in education. Third, LT has a positive impact on children's human capital investment, as measured by educational expenditure. This effect is driven by the income increase associated with LT to the higher-paying non-agricultural sector. However, this increased investment in children's education is disproportionately higher for families with higher educational levels, leading to a widening of the intergenerational inequality gap. Results from a robustness check using provincial panel data largely confirm the main findings. The positive relationship between FPD and LT is upheld, with FPD driving increases in both overall and non-agricultural employment. Additionally, the effect of labor transfer on average educational levels is investigated at the provincial level, showing that increases in the non-agricultural employment rate is positively associated with educational attainment.

The findings provide compelling evidence for the mediating role of labor transfer in the relationship between FPD and human capital investment. Increased FPD drives labor transfer to the non-agricultural sector, which, in turn, creates positive spillover effects on human capital investment. This mechanism is more pronounced for females, suggesting that policies promoting LT can contribute to greater gender equality in education and skills. However, the income effect of LT also contributes to exacerbating intergenerational inequality, highlighting the importance of addressing the unequal distribution of benefits associated with economic growth. The study's findings are significant because they provide a nuanced understanding of the channels through which FPD impacts human capital investment, moving beyond simple correlations to highlight causal relationships and policy implications.

This research provides valuable insights into the multifaceted effects of FPD-induced LT on human capital investment in China. The study demonstrates a causal link between FPD and human capital investment, highlighting the importance of structural changes in labor markets. Future research could explore the sectoral variations within the non-agricultural sector and delve into the impact of technology-intensive FPD to refine the understanding of this nexus. This research emphasizes the need for policies focused on promoting balanced human capital development and reducing income inequality to ensure that the benefits of economic growth are shared more equitably across genders and generations.

The study acknowledges some limitations. The analysis focuses on total FPD without differentiating between types of FPD (e.g., technology-intensive vs. labor-intensive). Also, the impact of labor transfer within the non-agricultural sector is not investigated in detail; further research is needed to examine the effects of transferring from agriculture to low-skill versus high-skill jobs within the non-agricultural sector. Lastly, the effects of rapid technological advancements such as the rise of artificial intelligence (AI) are not explicitly considered, creating a potential area for future investigation.