Unskilled Migration and Vertical Disintegration: Theory and Evidence from China

Abstract

This paper studies how rural-urban migration in China affects the vertical disintegration of firms. We construct a theoretical model and find that the inflow of rural migrants increases the output of firms in urban areas. This leads to a higher degree of vertical disintegration of firms due to the decreasing returns to scale. We also find that the wage of skilled workers relative to that of unskilled workers in urban areas is increased with rural migrants as the vast majority of rural migrants are unskilled. Our empirical findings are consistent with our model predictions using China’s population census and manufacturing firm-level data in 2005.