The 20th CPC National Congress called for efforts to modernize the industrial system and continue to focus on the real economy in pursuing economic growth. Promoting the high-quality development of the real economy is a key link in China’s push to build a new development pattern and of great significance to maintaining economic prosperity and stability.

Under the guidance of the new development philosophy, China has embarked on a new journey to build itself into a modern socialist country in all respects. To this end, “we must, first and foremost, pursue high-quality development,” the 20th CPC National Congress report affirms. This has raised a higher requirement for the development of the real economy in China. The traditional economic growth model featuring high investment and extensive development has been unsustainable, highlighting the inevitable need for the real economy to transition to high-quality development. During this transition, talent is essential to invigorating the market in the real economy, so enhancing talent cultivation is especially crucial to high-quality real economic development.

Upgraded human capital structure

Economists attached human capital to labor to quantify man’s economic value. This mainly refers to laborers’ inalienable capital, such as knowledge and skills, educational and technical levels, and health.

Since reform and opening up, China has accumulated rich human capital for its modernization drive through the popularization of higher education. The seventh population census, conducted in 2020, shows that the average years of schooling for citizens aged 15 and above were 9.91 years. In 2022, graduates from institutions of higher education have exceeded 10 million. To attain the goal of high-quality development, it is fundamental to increase labor productivity through the improvement of human capital.

Human capital is primarily embodied in the quantity and quality of laborers. Human capital quantity refers to the size of the labor force equipped with certain skills, while the quality measures sophistication levels of the skills. Both the quantity and quality of human capital matter to advancing the high-quality development of the Chinese economy.

Theories about human capital’s impact on the high-quality development of the real economy fall into two categories. Experts in the first category argue that the human capital stock has a significant bearing on economic growth. Representative scholars, like American economists David Romer and Michael Grossman, hold that human capital, as input in research and development (R&D), will bring sustained output growth through R&D activities.

In the second category, scholars including American economist Robert Lucas Jr. and Japanese economist Hirofumi Uzawa contend that human capital’s incremental growth is a crucial economic growth factor, emphasizing that human capital accumulation is the major force driving economic development. By introducing human capital to the production function as a productive factor, and incorporating human capital’s externality, the growth of human capital will be unfettered from the law of diminishing marginal returns, thus realizing long-term growth.

In recent years, China has achieved remarkable results in the cultivation of higher education talent. The human capital stock and incremental growth both have shown a notable upward trend. Since China started to expand college and university enrollments in 1999, the annual increase of fresh graduates from colleges and universities registered hundreds of thousands, and in 2022, the number of graduates grew by more than 1 million from the previous year.

As a result, the human capital structure has changed significantly, as the proportion of laborers with low levels of education decreases while that with high educational levels increases. Advanced human capital is progressively replacing elementary human capital as the dominant force.

Since human capital has “downward compatibility” characteristics, human capital with high skill levels can do what low-skilled laborers do. Upgrading the human capital structure, marked by evolution from low-level to high-level human capital, can generate a positive impact on high-quality economic development for advanced talent’s scarce capacities in production allocation, scientific and technological innovation, and absorption.

Optimizing industrial allocation

In theory, an increase in workers’ education years can substantially enhance an enterprise’s innovation capacity, but the conclusion is not necessarily tenable in a macro reality. Many empirical studies about education and innovation in China reveal that the country has indeed accumulated abundant human capital since 1999, but if human capital is counted in growth accounting, the total factor productivity has a limited contribution to economic growth. The role of increasing average schooling years in strengthening a country’s innovation capacity, and in improving economic performance, needs to be enhanced. To make the hypothesis that human capital accumulation fuels innovation a universally applicable law, it is necessary to take the general law of real economic development in China into consideration.

First comes the industrial allocation of human capital. Large samples of data from population censuses show that the working population in China’s manufacturing industry had relatively low levels of education on average for many years. Employees with only a junior high school diploma accounted for more than 50% of the entire labor force in manufacturing, and only around 10% had received higher education. The shortage of high-level talent is particularly prominent.

After constructing a talent allocation indicator, on city and industry levels, using detailed individual occupational and educational information in population sampling surveys, we found a tendency for China’s talent allocation to deviate from the real economy, which has raised production costs in the real economy and narrowed its development space. Due to the failure to optimize human capital allocation among industries within the real economy, the positive impact of average educational levels on national scientific and technological innovation capacities has not been significant, thus affecting the real economy’s innovation-driven transition.

Studies also show that for several years, the rapid development of modern finance has lured much of China’s human capital to the financial industry, inhibiting optimal human capital allocation in physical industries to some extent. The excessive allocation of human capital in the financial industry is likely to crowd labor out of the production sector. Finance will transfer wealth from production, weakening the internal incentive mechanism which fosters the entrepreneurial spirit.

However, in China’s modernization drive, the demand for high-skilled talent in the real economy is on the rise. It is essential, at the fundamental level, to fill the talent demand gap and maximize the utilization of human capital, encouraging well-educated talent to develop in the real economy to provide sufficient human capital for physical innovation entities, thereby exerting the positive impact of human capital on the high-quality development of the real economy.

Directing talent to real economy

High-quality human capital is foundational for the Chinese economy to achieve high-quality development and blaze an original and innovative trail with Chinese characteristics in the new era. It is vital to direct brilliant minds to physical industries in an orderly manner and entrench the real economy’s status as the most vigorous field in scientific and technological innovation, thus building a world-leading scientific and technological innovation system.

To this end, China should attach importance to boosting the appeal of innovative entities to forge the real economy into a high ground for gathering talent, which demands efforts in the following three aspects.

First, attention should be paid to establishing long-term advantages for the real economy’s high-quality development. It is important to ensure both a stable quantity and long-term improvement of quality. China has made outstanding achievements in high-tech manufacturing, such as high-speed rail, aerospace, and 5G, and has seen fast development in the new generation of digital technologies like artificial intelligence and big data. For the next step, it is necessary to extend the industrial chain to the high end of value chains and foster new drivers for sophisticated industries to build up long-term advantages for the real economy’s high-quality development.

Second, it is critical to improve the income distribution system and expand channels for employees in physical industries to join the middle-income ranks. One of the key links in improving the current national income distribution pattern is to enlarge the size and proportion of middle-income groups, and employees in physical industries offer promise in this regard.

According to data from the National Bureau of Statistics, the income levels of workers in the manufacturing industry comprise approximately 80% to 90% of average income levels in urban areas. There is still a gap with middle-income groups.

More importantly, the monetary income gap will affect human capital’s industrial allocation structure. The allocation of human capital in the real economy requires adequate monetary incentives, so increasing the real economy’s appeal should focus on regularizing the income distribution order and including workers in the real economy into middle-income groups at least.

Third, importance should be attached to improving market expectations, maintaining manufacturing’s basically stable share in the economy, and cultivating a batch of high-quality brick-and-mortar enterprises. The famous “Lucas critique” in economics tells us that inadequate consideration of policy changes’ impact on people’s expectations will make it difficult for traditional policy analysis to correctly evaluate the effect of economic policies.

Similarly, market expectations are also a major factor affecting laborers’ industrial choices. In terms of the macro growth environment, the share of output from the manufacturing industry has dropped to some degree. In the new era, only by keeping the manufacturing share within a reasonable range, and promoting structural optimization and upgrade of physical industries, can market expectations remain stable.

To laborers in enterprises, steadily developing brick-and-mortar enterprises can bring agglomeration and scale effects, which is vital to the high-quality development of physical industries. Therefore, efforts are needed to fundamentally empower the Chinese real economy’s high-quality development by nurturing a batch of high-quality leading enterprises and actively creating an institutional environment favorable to the development of brick-and-mortar enterprises, in order to ensure stable development expectations for excellent human capital when they choose the real economy for their career.

Wang Qichao is from the School of Economics at the Capital University of Economics and Business. Sun Guangsheng is a professor from the School of Economics at Liaoning University.