We use microsample data from the 2005 (1%) National Population Sample Survey in southeast China and examine the relationship between the effect of hukou status on income and return to education under China's rural–urban divide. For labor-market return we find that: (1) the influence of hukou status is deeply rooted in an indivdual's other key features (occupation, years of schooling, and working location) in the labor market, and (2) hukou status affects labor-market return primarily through its influence on people's return to education. Assisted by spline regression models, we find that the gap of return to education among people with different hukou status increases as years of schooling decrease, and reaches its peak in primary education. The data overwhelmingly suggest that individuals' human capital was largely determined by the place (rural versus urban) where they were born and received their compulsory education, which highlights the role of China's rural–urban divide in shaping people's labor-market return.
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