Working Paper

Rising Skill Supply, Technological Changes, and Innovation: A Quantitative Exploration of China

Abstract: Can the expansion of higher education lead to firm productivity growth? In this paper, we examine how China's college expansion program contributes to the rapid growth of firms' R&D expenditure and productivity. In our model, heterogeneous firms make endogenous R&D decisions, requiring them to allocate skilled workers between production and R&D. We structurally estimate the model using firm-level data on the level and distribution of R&D, as well as macro-level data on skill prices and sectoral allocation. Quantitative analysis reveals that between 2004 and 2018, the combination of the R&D-sector-biased technology shock, the skill-biased technology shock, and the skilled-labor supply shock leads to a 12 percent increase in total factor productivity (TFP), of which one-fifth is explained by the rising supply of skilled labor. Counterfactual analysis shows that a further increase in the share of skilled labor has the potential to increase TFP by an additional 2 percent, but the marginal effect diminishes due to the rising wages of unskilled labor.

JEL Classification: J24; O31; O32;

https://doi.org/10.26509/frbc-wp-202515

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2025-06-23

Number: WP 25-15