Misallocation of human capital and productivity: evidence from China

Abstract The purpose of the paper is to outline the empirical framework of the model of the impact misallocation of human capital on productivity (TFP).Using provincial panel data from 2001 to 2015, this paper studies the effect of the misallocation of human capital on productivity in China. We find that misallocation of human capital reduces China’s productivity significantly. Most importantly, we argue that the important channels through which misallocation of human capital affects productivity are industrial structure upgrading, technological innovation and labour productivity. Furthermore, counterfactual experiments show that eliminating the labour mismatch between industries completely could be associated with an increase in productivity of around 41% for the whole sample in China. The results suggest correcting the current imperfections of incentives in non-productive sectors, where encouraging more human capital to work in high-tech enterprises may be a vital measure to stimulate the development of emerging economies