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A Theoretical Model of the Chinese Labor Market

  • Fields, Gary S.

    ()

    (Cornell University)

  • Song, Yang

    ()

    (Renmin University of China)

This paper constructs a theoretical labor market model for China, and utilizes the model to examine the effects of various labor market policies on economic well-being. Two key features of the model are a segmented labor market involving three sectors – state-owned enterprises, private enterprises, and agriculture – and China's unique household registration system (hukou). The major existing theoretical models of employment and development – the Lewis model, the integrated labor market model, the Harris-Todaro model, and various segmented labor market models – stylize different developing countries' labor markets in other ways but do not include these two key features. The paper first formulates the equations of the model, then obtains a closed form solution given initial conditions, and then deduces the labor market and welfare consequences of several policy interventions, which include promoting rural development, reducing the cost-of-living in urban areas for rural hukou holders, and offering some rural workers the chance to convert from rural to urban hukou status. These policy interventions are analyzed using two alternative welfare criteria: first-order stochastic dominance and an abbreviated social welfare function. Using both social welfare criteria, it is shown that the rural development policy is unambiguously welfare-improving, while the other two policies have ambiguous effects on social welfare. None of these policies is unambiguously welfare-decreasing.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7278.

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Length: 48 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7278
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  1. Gagnon, Jason & Xenogiani, Theodora & Xing, Chunbing, 2011. "Are All Migrants Really Worse Off in Urban Labour Markets? New Empirical Evidence from China," IZA Discussion Papers 6268, Institute for the Study of Labor (IZA).
  2. Razin, Assaf & Sadka, Efraim, 1995. "Resisting Migration: Wage Rigidity and Income Distribution," CEPR Discussion Papers 1091, C.E.P.R. Discussion Papers.
  3. Corrado Giulietti & Guangjie Ning & Klaus F. Zimmermann, 2012. "Self-employment of rural-to-urban migrants in China," International Journal of Manpower, Emerald Group Publishing, vol. 33(1), pages 96-117, June.
  4. Saint-Paul, G., 1993. "Unemployment, Wage Rigidity, and the Returns to Education," DELTA Working Papers 93-11, DELTA (Ecole normale supérieure).
  5. Fields, Gary S., 1975. "Rural-urban migration, urban unemployment and underemployment, and job-search activity in LDCs," Journal of Development Economics, Elsevier, vol. 2(2), pages 165-187, June.
  6. Fields, Gary S., 2005. "A welfare economic analysis of labor market policies in the Harris-Todaro model," Journal of Development Economics, Elsevier, vol. 76(1), pages 127-146, February.
  7. Whalley, John & Zhang, Shunming, 2007. "A numerical simulation analysis of (Hukou) labour mobility restrictions in China," Journal of Development Economics, Elsevier, vol. 83(2), pages 392-410, July.
  8. David Neumark, 1988. "Employers' Discriminatory Behavior and the Estimation of Wage Discrimination," Journal of Human Resources, University of Wisconsin Press, vol. 23(3), pages 279-295.
  9. Yang Song, 2012. "Poverty Reduction in China: The Contribution of Popularizing Primary Education," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 20(1), pages 105-122, 01.
  10. Dong, Xiao-yuan & Xu, Lixin Colin, 2009. "Labor restructuring in China: Toward a functioning labor market," Journal of Comparative Economics, Elsevier, vol. 37(2), pages 287-305, June.
  11. Jin Song & Shi Li, 2010. "Ownership and Earnings Inequality in Urban China," Frontiers of Economics in China, Higher Education Press, vol. 5(4), pages 582-603, December.
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