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

Thomas Hertel,Fan Zhai

doi:10.1016/j.econmod.2005.08.004

Abstract

This paper evaluates the impact of some key factor market reforms on rural–urban inequality and income distribution, using a household-disaggregated, recursive dynamic computable general equilibrium (CGE) model of China. We also explore how these factor market reforms interact with product market reforms currently underway as part of China's WTO accession process. The simulation results show that the reforms in rural land rental market and Hukou system, as well as increasing off-farm labor mobility, would reduce the urban–rural income ratio dramatically. Furthermore, the combination of WTO accession and factor market reforms improves both efficiency and equality significantly.

Highlights

Over the last fifty years, there have been three peaks in regional inequality within China: the Great Famine of the 1950’s, the Cultural Revolution of the late 60’s and early 70’s, and, most recently the period of openness and global integration of the 1990’s (Kanbur and Zhang, 2001)
The release of these workers from agriculture tends to depress wages in the rural, non-farm economy, where wages fall by 10.59% in the case of land reform. (All price changes are relative to the numeraire, which is foreign exchange.) This wage drop plays a role in dampening outmigration from agriculture
These results show that the incremental effects of World Trade Organization (WTO) accession in the presence of labor market reforms tend to benefit the urban households more, and the rural households somewhat less, than WTO accession in the absence of such reforms

Summary

Introduction

Over the last fifty years, there have been three peaks in regional inequality within China: the Great Famine of the 1950’s, the Cultural Revolution of the late 60’s and early 70’s, and, most recently the period of openness and global integration of the 1990’s (Kanbur and Zhang, 2001). Recent estimates put the number of “floating workers” (excluding commuters) at about 90 million or roughly 19% in 2001 (Fan and Qie, 2002) Concern about this increasing rural-income disparity has been heightened in light of China’s current accession to the World Trade Organization (WTO). We introduce a novel approach to the modeling of rural-urban labor market linkages in China We support this empirical model by drawing on recent econometric estimates of the relevant transfer elasticities, as well as surveybased estimates of the current extent of the labor market distortion. These estimates are incorporated into a CGE model with highly disaggregated households in both the rural and urban areas, based on newly available data from the National Statistical Bureau of China. The final section offers conclusions and suggestions for future research

Modeling the Labor Market Distortions in China

CGE Model

Simulation Results

Conclusions