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Labor market distortions, rural-urban inequality and the opening of China's economy

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  • Hertel, Thomas
  • Zhai, Fan

Abstract

The authors evaluate the impact of two key factor market distortions in China on rural-urban inequality and income distribution. They find that creation of a fully functioning land market has a significant impact on rural-urban inequality. This reform permits agricultural households to focus solely on the differential between farm and non-farm returns to labor in determining whether to work on or off-farm. This gives rise to an additional 10 million people moving out of agriculture by 2007 and lends a significant boost to the incomes of those remaining in agriculture. This off-farm migration also contributes to a significant rise in rural-urban migration, thereby lowering urban wages, particularly for unskilled workers. As a consequence, rural-urban inequality declines significantly. The authors find that reform of the Hukou system has the most significant impact on aggregate economic activity, as well as income distribution. Whereas the land market reform primarily benefits the agricultural households, this reform's primary beneficiaries are the rural households currently sending temporary migrants to the city. By reducing the implicit tax on temporary migrants, Hukou reform boosts their welfare and contributes to increased rural-urban migration. The combined effect of both factor market reforms is to reduce the urban-rural income ratio dramatically, from 2.59 in 2007 under the authors'baseline scenario to 2.27. When viewed as a combined policy package, along with WTO accession, rather than increasing inequality in China, the combined impact of product and factor market reforms significantly reduces rural-urban income inequality. This is an important outcome in an economy currently experiencing historic levels of rural-urban inequality.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 23 (2006)
Issue (Month): 1 (January)
Pages: 76-109

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Handle: RePEc:eee:ecmode:v:23:y:2006:i:1:p:76-109

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Web page: http://www.elsevier.com/locate/inca/30411

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References

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  1. Shaohua Chen & Martin Ravallion, 2004. "Welfare Impacts of China's Accession to the World Trade Organization," World Bank Economic Review, World Bank Group, vol. 18(1), pages 29-57.
  2. Anderson, Kym & Huang, Jikun & Ianchovichina, Elena, 2003. "Long-run impacts of China's WTO accession on farm-nonfarm income inequality and rural poverty," Policy Research Working Paper Series 3052, The World Bank.
  3. Shoven,John B. & Whalley,John, 1992. "Applying General Equilibrium," Cambridge Books, Cambridge University Press, number 9780521266550, April.
  4. Yaohui Zhao, 1999. "Leaving the Countryside: Rural-to-Urban Migration Decisions in China," American Economic Review, American Economic Association, vol. 89(2), pages 281-286, May.
  5. Ianchovichina, Elena & Martin, William, 2003. "Economic impacts of China's accession to the World Trade Organization," Policy Research Working Paper Series 3053, The World Bank.
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Cited by:
  1. Jing Cao, 2008. "A Dynamic Computable General Equilibrium Analysis of Environmental Taxation and "Rural-Urban" Migration Distrotions in China," EEPSEA Research Report rr2008011, Economy and Environment Program for Southeast Asia (EEPSEA), revised Jan 2008.
  2. Wei Zou & Yong Liu, 2010. "Skilled Labor, Economic Transition and Income Differences: A Dynamic Approach," Annals of Economics and Finance, Society for AEF, vol. 11(2), pages 247-275, November.
  3. Zhai, Fan & Hertel, Thomas W., 2009. "Economic and Poverty Impacts of Agricultural, Trade and Factor Market Reforms in China," Agricultural Distortions Working Paper 52787, World Bank.
  4. Lin, Justin Yifu & Martin, William J., 2009. "The Financial Crisis and Its Impact on the Global Agricultural Landscape," 2009 Conference, August 16-22, 2009, Beijing, China 53208, International Association of Agricultural Economists.
  5. Wang, Xiaobing, 2007. "Labor market behavior of Chinese rural households during transition," Studies on the Agricultural and Food Sector in Central and Eastern Europe, Leib­niz Institute of Agricultural Development in Central and Eastern Europe (IAMO), volume 42, number 92321.
  6. Arvind Virmani, 2006. "China’s Socialist Market Economy - Lessons Of Success," Macroeconomics Working Papers 22274, East Asian Bureau of Economic Research.
  7. Anping Chen & Nicolaas Groenewold, 2009. "Regional Equality and National Development in China: Is There a Trade-Off?," Economics Discussion / Working Papers 09-21, The University of Western Australia, Department of Economics.
  8. Lu, Zhigang & Song, Shunfeng, 2006. "Rural-urban migration and wage determination: The case of Tianjin, China," China Economic Review, Elsevier, vol. 17(3), pages 337-345.
  9. Anping Chen & Nicolaas Groenewold, 2009. "Reducing Regional Disparities in China: An Evaluation of Alternative Policies," Economics Discussion / Working Papers 09-06, The University of Western Australia, Department of Economics.
  10. Ying Liang & Yingying Yi & Qiufen Sun, 2014. "The Impact of Migration on Fertility under China’s Underlying Restrictions: A Comparative Study Between Permanent and Temporary Migrants," Social Indicators Research, Springer, vol. 116(1), pages 307-326, March.
  11. Yinhua Mai & Xiujian Peng & Peter B. Dixon & Maureen T. Rimmer, 2009. "The effects of facilitating the flow of rural workers to urban employment in China," Centre of Policy Studies/IMPACT Centre Working Papers g-188, Victoria University, Centre of Policy Studies/IMPACT Centre.
  12. Li, Ji Feng & Wang, Xin & Zhang, Ya Xiong, 2012. "Is it in China's interest to implement an export carbon tax?," Energy Economics, Elsevier, vol. 34(6), pages 2072-2080.
  13. Yinhua Mai & Xiujian Peng, 2011. "Labour Market Reform, Rural Migration and Income Inequality in China - A Dynamic General Equilibrium Analysis," Centre of Policy Studies/IMPACT Centre Working Papers g-221, Victoria University, Centre of Policy Studies/IMPACT Centre.
  14. Vennemo, Haakon & Aunan, Kristin & He, Jianwu & Hu, Tao & Li, Shantong & Rypd3al, Kristin, 2008. "Environmental impacts of China's WTO-accession," Ecological Economics, Elsevier, vol. 64(4), pages 893-911, February.

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