This paper studies the contribution of schooling to rural income in China during factor market
liberalization between 1986 and 1995. The relaxation of controls permitted farm households to
reallocate productive inputs from agriculture to nonagricultural activities. It is hypothesized that
education facilitates this adjustment. Panel data from Sichuan province suggest that schooling
enhanced the ability of farmers to devote labor and capital to nonfarm production given the evidence
that less-than-optimum levels of these inputs were allocated to nonagricultural uses. During the
transition, the expansion of nonfarm activities contributed significantly to household income growth