The Effect of Migration Policy on Growth, Structural Change, and Regional Inequality in China

The Effect of Migration Policy on Growth, Structural Change, and Regional Inequality in China

Abstract

China’s impressive economic growth since 2000 is well known; its significant structural transformation and regional income convergence is less so. Since 2000, while its aggregate income quadrupled, the inequality across provinces fell by a third and the share of employment in agriculture fell by half. Worker migration is central to this transformation, with almost 280 million workers living and working outside their area of Hukou registration by 2015. Combining rich individual-level data on worker location and occupation decisions from 2000 to 2015 with a spatial general equilibrium model of China’s economy, we quantify the size and consequences of reductions in internal migration costs. We find that between 2000 and 2015 migration costs fell by forty percent, with the cost of moving from agricultural rural areas to non-agricultural urban ones falling even more. In addition to contributing to growth, these migration cost changes account for the majority of the reallocation of workers out of agriculture and the drop in regional inequality. We compare the effect of migration policy changes with other important economic factors in China, including change in trade costs, capital market distortions, average cost of capital, and productivity. While each contributes meaningfully to growth, migration policy is central to China’s structural change and regional income convergence. Finally, we find the slow-down in growth between 2010 and 2015 is associated with smaller reduction in inter-provincial migration costs and a larger role of capital accumulation during this five-year period.

Publication
Journal of Monetary Economics, revisions requested
Date