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GTAP Resource #1440

"Labor Market Distortions, Rural-Urban Inequality and the Opening of China's Economy"
by Zhai, Fan and Thomas Hertel

This paper evaluates the impact of some key labor market reforms on rural-urban inequality and income distribution, using a household-disaggregated, recursive dynamic computable general equilibrium (CGE) model of China. We focus specifically on the labor markets where many barriers prevent a smoothly functioning market. The labor market imperfections considered include: (a) the hukou system of rural and urban household registration that has supported significant differences in rural and urban wages and has contributed to the existence of nearly 100 million temporary migrant workers in China, (b) the absence of a fully functioning land market which would permit existing land owners to rent their land to others and migrate to the city if they found wages there to be more attractive, and (c) the relatively low elasticity of off-farm labor supply which inhibits the transmission of wage signals between the farm and non-farm economies. We also explore how these factor market reforms interact with product market reforms currently underway as part of China¡¯s WTO accession process.

Specifically, 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 survey-based 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 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.

Resource Details (Export Citation) GTAP Keywords
Category: 2004 Conference Paper
Status: Published
By/In: Presented at the 7th Annual Conference on Global Economic Analysis, Washington DC, USA
Date: 2004
Created: Zhai, F. (4/26/2004)
Updated: Zhai, F. (4/26/2004)
Visits: 3,128
No keywords have been specified.

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