The Buffering Effect of Higher Education Expansion on the Okun's Law in China

This paper studies the short-run relationship between the labor market and economic fluctuations using China's province-level data and further investigates how higher education expansion policy influences this relationship. Following Okun's law framework, we show that besides total employment, labor force participation also responds to economic fluctuations, resulting in a low sensitivity in the unemployment rate. Based on the interacted variable analysis, we also find that economic growth tends to have larger impacts on labor market indicators during economic downturns than upturns. Lastly, we provide novel evidence that higher education expansion buffers the relationship between the labor market and aggregate demand conditions during economic downturns. This paper sheds some light on achieving more inclusive economic growth in emerging economies through education policy.