Econometrics paper

The Effect of Family Income on Education Attainment in China

Yifan Yin

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Research problem

In China, income polarization is particularly acute, children from low-income families finding it increasingly difficult to move into the upper income brackets when they grow up. It’s significant for children from low-income families to receive more education, since to some extent, education level is an indicator of the type of wages one will earn.

Educational attainment is determined by a combination of factors. Some children born in a family with greater ability have an advantage because both biology and culture are transmitted from parents to children (Becker & Tomes, 1986). But among all the biology and culture factors, family income is an important one since the gap between family income can possibly be narrowed by government policies. We know from existing research that children from families with higher income tend to have better performance in many dimensions than those from families with lower income (Gregg & Machin, 2000). The problem is, to which extent the differences between education attainment are caused by family income itself, since the reason can also be parents’ education, parenting styles, parents’ IQ and so on.

The purpose of this research is to measure the independent effect of family income on education attainment in China. We expect the family income is positively related to the education attainment. If they are strongly connected, then the government can increase the overall education level by subsiding the low-income families. Furthermore, both economic mobility and inequality can be targeted by the policy.

Literature Review

Many research has been done to examine the relationship between family income and education attainment. Some early research used the OLS method, Becker and Tomes (1986) used a set of regressors including family income, parents’ education and investment on education. They found family income was an important factor. However, the use of the OLS method inevitably led to bias in the estimations since there exists omitted variable bias, the correlation between family income and education attainment is not only due to the effect of family income, but also parents’ ability, which is hard to measure.

Many later research used Instrumental Variables to address the endogeneity in the OLS model. Loken (2010) used a unique dataset for Norwegians born in the period from 1968-1973. The Norwegian oil shock led to an overall increase in income. The oil shock was the instrument since it was unrelated to education but related to income. Shea (2000) did a research on the impact of parental income on children’s human capital. She also started from OLS method and then found some bias was likely to remain due to important unobserved differences in ability among parents. She used IV consisting of the dummy variables for fathers’ union, industry and job loss experience and then found the impact of parental income was very small.

Methodology

To estimate the independent effect of family income on education attainment, the OLS model will be considered. I want to start with a simple regression model and then extend it to a longer one. The dependent variable is the participation rate of  PSE and the independent variables will include family income, parents’ education, parents’ IQ and so on. I also want to find an IV, and then do a 2SLS if the dataset allows me to do so.

Data

I found China Health and Nutrition Survey(CHNS), which is an ongoing open cohort which aims to examine the effects of the health, nutrition, and family planning policies and programs implemented by national and local governments.

I am also considering China Family Panel Studies(CFPS), which is a nationally representative, annual longitudinal survey of Chinese communities, families, and individuals launched in 2010 with a focus on the economic and well-being of the Chinese population.

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