China’s college expansion program, which was implemented in 1999, significantly increased the share of college-educated workers in the urban labor force. We find that returns to education were not responsive to changes in local skill supply between then and 2009. To explain the trend, we develop a model of endogenous technology adoption and predict that increasing the share of college-educated workers leads firms to adjust their use of production technology. We construct supply shocks in local labor markets based on policy-driven variations in the changes of college enrollment quotas across cities. Using panel data from over 20,000 large manufacturing firms, we find that an enlarged college-educated labor force causes skill-intensive firms to invest more in capital and R&D as well as employ more workers, evidence that supports the theory of endogenous technology adoption.
J24: Human Capital; Skills; Occupational Choice; Labor Productivity
I26: Returns to Education
I28: Education: Government Policy
O32: Management of Technological Innovation and R&D