Returns to Education and Earnings Inequality in Segmented Labour Market: A Study of Migrants and Locals in Large Chinese Cities

Increasing earnings inequality has been a feature of China’s segmented urban labour markets in recent decades. This paper examines the effects of household registration or hukou-induced segmentation on earnings inequality and returns to education in urban China, using data from a survey conducted in four large Chinese cities in 2008, with a particular focus on three groups (urban locals, urban-to-urban migrants, and rural-to-urban migrants). The paper estimates returns to education in urban China by estimating separate Mincer equations for the three groups. A quantile regression is also carried out to examine the effects of covariates on earnings at different points of the conditional distribution. In addition, a decomposition of earnings differentials between groups is carried out to further identify the effect of education on earnings inequality using the Blinder-Oaxaca approach. The results indicate that factors such as downward mobility, fewer years of schooling and jobs in informal sectors have negative effects on rural migrants (but less so on urban migrants). It also finds that education is an important source of inequality. Inequality in educational attainments plays an important role in determining returns in urban labour market.