Previous work on the market transition in reform-era China has missed the direct link between individuals’ labor market history and individuals’ labor market outcome. A typology of workers is developed based on individuals’ labor market histories, and a model of selective mobility of workers from the state sector to the market sector is offered as an explanation for higher earnings returns to education in the market sector. Analysis of data from an urban survey in China reveals that commonly observed higher earnings returns to education in the market sector are limited only to recent market entrants, and that early market entrants resemble state workers in both their level of earnings and returns to education. These results challenge the prevailing wisdom that education is necessarily more highly rewarded in the market sector. Thus it is concluded that higher returns to education in the market sector should not be construed as being caused by marketization per se, and instead that the sorting process of workers in labor markets helps explain the sectoral differentials.
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