Macroeconomic Impacts of College Expansion on Structural Transformation and Energy Economy in China: A Heterogeneous Agent General Equilibrium Approach

Abstract

In this study, we construct heterogeneous agent general equilibrium models to investigate the relative importance of labor endowment in driving structural transformation. We aim to explore the following question: beyond the demand-side and supply-side structural transformation driving forces extensively studied in the existing literature, does labor, as a crucial endowment, play a pivotal role in facilitating structural transformation and the energy economy? In contrast to the prevalent partial equilibrium analyses, our study employs a general equilibrium framework to conduct a policy evaluation of college expansion, a significant policy that has altered the labor endowment structure in China. Our approach begins with developing a multi-sector model that integrates a nested CES production function and incorporates workers with different skill levels to assess the macroeconomic impact of college expansion on structural transformation. We calibrate the base model to reflect labor allocations across sectors and skill levels using the simulated method of moments (SMM), ensuring that the model-generated data align closely with actual labor allocation data. Utilizing this calibrated model, we perform counterfactual experiments to assess the impact and relative importance of the college expansion policy. Our counterfactual analysis demonstrates that the policy has resulted in an average decrease of 7.7% in labor allocation in the agricultural sector, alongside an average increase of 8.9% in the industry sector and 28.7% in the services sector. These results highlight the significant, yet often overlooked, contribution of labor in endowment-driven structural transformation. Furthermore, we extend the base model by constructing an industry-level heterogeneous agent general equilibrium model, enabling us to pinpoint which industries have developed as a result of the college expansion policy and recalibrate it at the industry level. This approach allows us to analyze the impact of changes in labor endowment on the energy economy. Counterfactual experiments conducted show that the college expansion policy has prompted a labor shift from industries with low energy efficiency and high pollution to high-end services. This macroeconomic pattern of structural transformation suggests that the college expansion policy has facilitated a transition toward a low-carbon economy by reducing dependency on high energy-consuming industries and promoting high-end services.