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Relaxing Hukou: Increased Labor Mobility and China’s Economic Geography

08 August 2012

China is one of the fastest growing economies in the world. Also, it is home to a huge (potential) internal market and a large number of very large and fast-growing cities. Arguably, China is a textbook case to analyse how agglomerating and spreading forces shape the economic landscape. Read more on this subject in the article by FEB Researchers Steven Brakman and Harry Garretsen (together with Maarten Bosker and Marc Schramm) in the Journal of Urban Economics .

prof. dr. J.H. Garretsen
prof. dr. J.H. Garretsen
prof. dr. S. Brakman
prof. dr. S. Brakman

The Hukou System

The recent phenomenal growth record of China has been accompanied by migration from the western and central provinces to China’s eastern (coastal) provinces, mainly involving rural migrants seeking jobs in China’s vibrant cities. As a result China’s urbanization rate has steadily risen over the last decades. Recent studies, however, argue that Chinese cities are still undersized due to the severe restrictions on labor mobility that are imposed through the so called Hukou system that limits internal migration between Chinese cities. The Hukou system is equivalent to an internal visa arrangement that is meant to regulate migration. In recent decades the system has been quite restrictive, not only by limiting migration flows from rural to urban areas, but also by putting a brake on inter-urban migration flows. Without a visa for a particular location, a Chinese citizen has no or only limited rights to housing, sell property, education, food or social security in that location. Those rights are tied to one’s official place of residence and a change in residency (if a citizen for instance would try to move from a rural area to a city) will only be matched with a transfer of these rights if the (local) authorities hand out a visa or permit for the new place of residence. The Hukou system results in a more evenly sized city size distribution in China compared to other countries with a similar level of development. This keeps China from reaping the full benefits of agglomeration.

Impact

In this paper, we study the impact of the Hukou system on the spatial distribution of economic activity in China. In particular, we provide answers to the question what a removal of the restrictions on labor mobility will imply for China’s internal economic geography. We do this by firmly basing ourselves in New Economic Geography (NEG) theory. In our view, NEG models are well suited to analyse the case of rapidly industrializing economies like China. In particular, the focus in most NEG models on the agricultural and manufacturing sector may seem outdated for western countries but it is (still) relevant for a country like China. Also NEG stresses the relation between cities instead of treating cities like ‘floating islands in space’, as is common in urban economics.

Empirical Strategy

Our empirical strategy consists of two steps. First, based on a sample of 264 Chinese Prefecture cities, we estimate the equilibrium wage equation that is central in NEG models. This not only allows us to empirically establish the link between a city’s wages and its market access as predicted by NEG theory, more importantly it provides us with the key structural model parameters that are crucial in our second step.
It is this second step that makes our study different from recent related NEG studies for China. We go one step further and make use of the complete NEG model. This allows us to make model-based predictions of what the consequences of a relaxation of China’s Hukou system could mean for its internal economic geography.

Gang of four

We find that increased labor mobility within China will lead to more pronounced core-periphery outcomes. Perhaps surprisingly, increased labor mobility will not necessarily benefit the now dominant coastal export-oriented cities.  The Big 4 among Chinese cities, Beijing, Shanghai, Guangzhou and Chongqing, will  further strengthen their dominant place in China’s urban hierarchy. But, in addition, two other groups of cities can be distinguished: non-coastal cities in the populous heartland of China offering preferential access to China’s enormous internal market, and several more peripheral cities that are shielded from competition with China’s largest population centres by virtue of their substantial distance from these centres.

Link to the full article

Contact: prof. dr. S. Brakman or prof. dr. J.H. Garretsen

Last modified:01 July 2015 11.47 a.m.

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