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To illustrate the worst-case scenario for China in the near future, Scott Rozelle pulls up a picture from Mexico. It's a completely barren manufacturing warehouse, abandoned after wages in Mexico rose to more than four dollars per hour.

Following its manufacturing moment in the 1980s, Mexico has been struggling to create jobs in part because 40 percent of its workers lack a high school education, the Stanford University Professor of Economics said.

Contrast this to South Korea, where almost the entire workforce has attained a high school degree. After manufacturing jobs left South Korea in the 1980s, he said, well-educated workers were able to upgrade to technical jobs like chip manufacturing and computer assembly.

The question for China is: South Korea or Mexico? Rozelle said.

With rising labor costs, China is under pressure to upgrade from low-cost manufacturing to high-tech production. But it's still an open question as to whether China's labor force will have the education levels to take on these new roles, or if the jobs will move elsewhere as they did from Mexico in the last few decades.

The odds are stacked against China. In some parts of the country, China's labor force more resembles Mexico's than South Korea's, with about 40 percent of workers in the poorest rural areas (China's 592 "nationally-designated poor counties," as deemed by China's anti-poverty authorities) lacking a high school education, Rozelle said.

Furthermore, the financial hurdles to attaining higher education are the highest in the world, illustrated most recently by a series of studies conducted by the Rural Education Action Project (REAP)—an umbrella group that includes Rozelle's Stanford University, Tsinghua University, the Chinese Academy of Sciences, Peking University and the Xi'an-based Northwest University.

In one REAP study of 62 nations, China claimed the highest tuition price for public rural high schools: $160 per student per semester, not including costs like housing and everyday living expenses. This is nearly three times the world's second-highest tuition in Indonesia, which also fully subsidizes the education costs of children under the poverty line.

It's also a stark contrast to the fact that the vast majority of nations—93 percent of those studied—fully subsidize education, including places like Brazil, India and Kenya.

The high costs of education will become even more problematic, Rozelle said, once China's economy begins to restructure towards higher-value production. If the skill levels of the labor force cannot keep up, China will be caught in a middle-income trap, he said, possibly leading to high unemployment and social strife—not unlike what is plaguing Mexico now, he said.

Even a small subsidy could push thousands of students into high school. In REAP's most recent study, Rozelle and his colleagues took 250 junior high classes in Shaaxi Province and selected the two poorest students from each, providing one with a 1,500 to 2,500 yuan subsidy. The survey revealed that 51 percent of students who had received the subsidy were admitted to high school in the fall of 2010, while only 38 percent without the subsidy enrolled.

To some degree, the Chinese government has recognized the importance of limiting the costs of education. In 2009, officials enacted a policy to reduce high school tuition costs, providing 20 percent of students in central regions and 30 percent in the China's western parts with scholarships ranging between 1,000 and 3,300 yuan annually.

But the policy has proved somewhat illusory: In its 2011 survey of more than 3,000 students in Shaanxi Province, REAP discovered that less than five percent of the targeted students had actually received the subsidies.