The threshold effect of high‐level human capital investment on China's urban‐rural income gap

Purpose The purpose of this paper is to shed light on the effect of high‐level human capital investment, using tertiary education as the proxy, on the urban‐rural income gap in China. Design/methodology/approach Using a panel dataset covering 28 provinces of China over the period from 1988 to 2007, this paper employs Hansen's method and two‐step GMM‐SYS estimator to estimate the threshold regression model and the dynamic fixed‐effect panel model, respectively. Findings The urban‐rural income gap is found to be related to high‐level human capital investment in an inverted U‐shaped pattern with respect to economic development level. The estimated threshold turning point is around 20,000 RMB GDP per capita. This estimate is sufficiently robust to model specifications and variants of the dependent variable. Social implications The authors forecast that high‐level human capital investment could play a role in bridging the urban‐rural income gap at the national level by 2014, when China's GDP per capita assumes an annual growth rate of 7.5 percent. Originality/value This, it is believed, is the first research to find an inverted U‐shaped pattern for high‐level human capital investment and urban‐rural income gap nexus in China.