The Chinese labor market has transitioned from a dual labor market to a neoclassical labor market. With wages increasing for skilled workers, the impact on schooling must be considered by policy-makers. Taking advantage of national representative data for 2005 and 2010, the present paper examines the hypothesis that increasing opportunity costs reduce children’s schooling. The empirical result is of particular relevance to poor areas, where people tend to have high discount rates and place more value on real time income. Although the total public investment in education has been increasing, our findings suggest that targeting relevant regions and compensating opportunity costs will improve the efficiency of education investments.

Key words: human capital, labor market changes, schooling decision
JEL codes: I25, I28, J24