China’s rapid economic growth was fostered by the complementarity between a solid base of medium-skill labor and a huge investment in physical capital. Its initial skill base was a consequence of an egalitarian education policy, giving access to primary schooling for all. To sustain economic growth, China is now facing serious challenges in the areas of education, skill formation, and the quality of its labor force. These challenges can be met by equalizing access to education, reducing restrictions on mobility, creating effective markets to finance human capital, and recognizing the life cycle dynamics of skill formation.

A distinction is often made between good inequality and bad inequality. A substantial part of the rising inequality in Chinese society is a consequence of higher returns to skilled labor. These returns give market signals to potential students about the benefits of attaining higher levels of skills. Properly harvested by capturing market incentives, this source of inequality is a force for productivity growth and social opportunity.

Inequality arising from lack of access to education and from restrictions on migration that make the accident of the region and family of birth central are unquestionably sources of bad inequality. Not only do they deny equal treatment to all Chinese citizens, they also impair productivity of the economy by forfeiting profitable economic and social investments.