SMU SOE Seminar Series (September 19, 2025): Talent Allocation, Government Brain Drain, and Innovation: Evidence from Chinese Public Sector Hiring Reform

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ABSTRACT

This paper examines the impacts of talent allocation on private sector growth and innovation, exploiting a 1994 reform of the Chinese labor market that ended government-oriented job allocation for tertiary graduates. Using a generalized DID framework and a Regression Discontinuity Design, I find that after the reform, tertiary graduates were more likely to work in the private sector, and their earnings decreased. The expansion of the talent pool and reduction in hiring costs spurred private sector growth. Prefectures with more graduates from industry-related majors experienced greater private firm entry in those industries after the reform. The reform also stimulated innovation: prefectures with more higher education institutions saw increases in design patents and trademarks, without crowding out other types of innovation. Consistent with private sector expansion, there was a rise in private sector innovations and a decline in public sector innovations.

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