A Numerical Simulation Analysis of (Hukou) Labour Mobility Restrictions in China John Whalley Department of Economics, The University of Western Ontario and Shunming Zhang Department of Finance, School of Economics, Xiamen University December 16-18, 2006 (HUKOU) Labour Mobility 2006 p. 1/41
Outline 1. Introduction 2. Analysis of Hukou Restriction Removal Using A Basic Model 3. Extending the Model to Capture House Price Effects on Migration Across Regions 4. A Model with a Distribution of Productivities within Regions 5. Conclusions and Remarks (HUKOU) Labour Mobility 2006 p. 2/41
1. Introduction 1. System of Hukou in China / Registered Permanent Residence 1.1 Hukou operates as a barrier to Urban / Rural Immigration. Labour Migration Restrictions / Labour flow Barriers 1.2 Hukou supports large regional wage differentials which labour markets do not compete away. Urban Wage Rate is greater than Rural Wage Rate Urban Income is greater than Rural Income (HUKOU) Labour Mobility 2006 p. 3/41
1. Introduction 1.3 Hukou system exists between urban and rural areas, and even within urban areas and within rural areas. 1.4 There are only three countries existing Hukou system / Labour Mobility Restrictions in the world. China, North Korea, and Vietnam 1.5 In China, Hukou has begun since early 1950s 1.6 Hukou Benefits on Education, Health, Housing, Insurance (HUKOU) Labour Mobility 2006 p. 4/41
1. Introduction 2. The Statistical Literature on GDP and Inequality in China 2.1 GDP growth rate has been over 8 % since 1978 2.2 Gini coefficient is increasing and over 0.4 from 1994 to 2005 (HUKOU) Labour Mobility 2006 p. 5/41
1. Introduction Lyons (1991) Tsui (1991, 1993, 1996, 1998) Bramall and Jones (1993) Roselle (1994) Chen (1996) Jalan and Ravallion (1998) Hare and West (1999) Kanbur and Zhang (1999) Zhang, Liu and Yao (2001) Chang (2002) (HUKOU) Labour Mobility 2006 p. 6/41
1. Introduction 3. Motivation: Hukou System of Permanent Registration grows relative inequality over the last 20 years. 4. Model Hamilton and Whalley (1984) 4.1 The Global Consequences of Immigration Restrictions 4.2 There is homogeneous labour 4.3 Differences in both wage rate and GDP per capita across countries are supported by immigration restrictions. U.S.A. Canada New Zealand Australia (HUKOU) Labour Mobility 2006 p. 7/41
1. Introduction 5. Intuition: A significant role for Hukou restrictions supports inequality in China. 5.1 We use economic models to decompose inequality change. 5.2 All wage and most income inequality disappear when labour migration restrictions are removed. 5.3 Gini coefficient (income inequality) reduces with removal of migration barriers / Hukou system. (HUKOU) Labour Mobility 2006 p. 8/41
1. Introduction 6. A further model extension urban house price rises retard rural-urban migration. 6.1 A two good general equilibrium model Two Goods: Consumption Good and Housing 6.2 To introduce region specific house price effects 6.3 To capture their dampening impacts on migration 6.4 Location specific housing stocks support differing urban and rural house prices. 6.5 Equilibrium migration condition equalize the real value of wage rates. (HUKOU) Labour Mobility 2006 p. 9/41
2. Inequality Decompositions Using A Basic Model There are 31 provinces, centrally administered municipalities and autonomous regions in the Chinese mainland. They are [Northern China] Beijing, Tianjin, hebei, Shanxi, inner Mongolia; [Northeastern China] Liaoning, Jilin, heilongjiang; [Eastern China] Shanghai, Jiangsu, Zhejiang, Anhui, Fujian, Jiangxi, Shandong; [Central and Southern China] Henan, Hubei, Hunan, Guangdong, Guangxi, Hainan; [Southwestern China] Chongqing, Sichuan, Guizhou, Yunnan, Tibet; [Northwestern China] Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang. (HUKOU) Labour Mobility 2006 p. 10/41
2. Inequality Decompositions Using A Basic Model They are ranked from rich to poor by GDP per capita in 2003 as Shanghai, Beijing, Tianjin, Zhejiang, Guangdong, Jiangsu, Fujian, Liaoning, Shandong, Heilongjiang, Hebei, Xinjiang, Hubei, Jilin, Hainan, Inner Mongolia, Hunan, Qinghai, Henan, Chongqing, Shanxi, Ningxia,Tibet, Anhui, Jiangxi, Sichuan, Shaanxi, Guangxi, Yunnan, Gansu, Guizhou. China = Chinese mainland + Hong Kong + Macao + Taiwan (HUKOU) Labour Mobility 2006 p. 11/41
2. Inequality Decompositions Using A Basic Model The model structure for the general case of S regions 1. S = 2 Urban [U] and Rural [R] Rich [R] and Poor [P] Eastern Coastal [EC] and Central and Western (non-coastal) [CW] zones Eastern and Central [EC] and Western Development [WD] zones (HUKOU) Labour Mobility 2006 p. 12/41
2. Inequality Decompositions Using A Basic Model 2. S = 3 Eastern [E], Central [C] and Western [W] zones 3. S = 6 Northern China [NC], Northeastern China [NEC], Eastern China [EC], Central and Southern China [CSC], Southwestern China [SWC], and Northwestern China [NWC] 4. S = 31 31 provinces, centrally administered municipalities and autonomous regions in China (HUKOU) Labour Mobility 2006 p. 13/41
2. Inequality Decompositions Using A Basic Model Production Function Y s = f s (L s ), s = 1,,S (1) where f s > 0 and f s < 0. Full Employment of Labour L s = L. s Labour market clearing across regions determines the common wage W = W s, s = 1,,S. There are no barriers to labour mobility, i.e., labour receives its marginal product in all regions, i.e. W = f s (L s), s = 1,,S. (2) (HUKOU) Labour Mobility 2006 p. 14/41
2. Inequality Decompositions Using A Basic Model V P L U MV P L R W 0 U Rent U W U Gain Rent R W R W 0 R L 0 U L 0 R L U L R (HUKOU) Labour Mobility 2006 p. 15/41
2. Inequality Decompositions Using A Basic Model Production Function Wage Rate Y s = A s L α s s, s = 1,,S (3) W s = Y s L s = α s A s L α s 1 s, s = 1,,S (4) (HUKOU) Labour Mobility 2006 p. 16/41
2. Inequality Decompositions Using A Basic Model Rent R s = Y s W s L s, s = 1,,S. (5) Income I s = Y s, s = 1,,S. (6) In Equilibrium, Full Employment of Labour L s = L. (7) s (HUKOU) Labour Mobility 2006 p. 17/41
2. Inequality Decompositions Using A Basic Model Two Regions Urban and Rural Areas Total output increases by about 13.26%. GDP per capita ratio falls from 2.045 to 0.706. 48.49% of the Work Force move from rural to urban areas 45.67% of the population move from rural to urban areas 27.23% of the population remains in rural areas. They become much richer, and their average income (GDP per capita) is 1.42 times higher than that in urban areas. (HUKOU) Labour Mobility 2006 p. 18/41
2. Inequality Decompositions Using A Basic Model Two Regions Rich and Poor Areas Total output increases by about 3.21%. GDP per capita ratio falls from 2.294 to 1.362. 25.36% of the Work Force move from rural to urban areas 25.14% of the population move from rural to urban areas 59.94% of the population remains in rural areas. Their average income (GDP per capita) is 73.42 % of that in urban areas from 43.60 %. (HUKOU) Labour Mobility 2006 p. 19/41
3. Extending to Capture House Price Effects on Migration Across Regions A two good general equilibrium model with goods and housing To introduce region specific house price effects To capture their dampening impacts on migration Location specific housing stocks support differing urban and rural house prices. Equilibrium migration condition equalize the real value of wage rates. (HUKOU) Labour Mobility 2006 p. 20/41
3. Extending to Capture House Price Effects on Migration Across Regions Production Functions Wage Rate Y s = A s L α s s, s = U,R (8) Rent W s = P G Y s L s = P G α s A s L α s 1 s, s = U,R (9) R s = P G Y s W s L s, s = U,R. (10) (HUKOU) Labour Mobility 2006 p. 21/41
3. Extending to Capture House Price Effects on Migration Across Regions Income I s = P G Y s, s = U,R. (11) National Income I = I s. s Full Employment of Labour L s = L. (12) s (HUKOU) Labour Mobility 2006 p. 22/41
3. Extending to Capture House Price Effects on Migration Across Regions Continuum of Individuals Uniformly Distributed over [t R,t U ] ˆt is the critical value of preference parameter Urban Individuals lie on the interval [ˆt,t U ] Rural Individuals lie on the interval [t R, ˆt] Cobb - Douglas Preference V t (G,H) = G 1 t H t, t [t R,t U ]. (13) (HUKOU) Labour Mobility 2006 p. 23/41
3. Extending to Capture House Price Effects on Migration Across Regions I U t = R U X U t + W U L U X U t + P U E U X U t = (P G Y U + P U E U )X U t, t [ˆt,t U ] (14) I R t = R R X R t + W R L U X R t + P R E R X R t = (P G Y R + P R E R )X R t, t [t R, ˆt] (15) where X U and X R are uniform distribution random variable on [ˆt,t U ] and [t R, ˆt]. (HUKOU) Labour Mobility 2006 p. 24/41
3. Extending to Capture House Price Effects on Migration Across Regions Utility maximization subject to a budget constraint G U t = 1 t P G I U t and H U t = t P U I U t, t [ˆt,t U ](16) G R t = 1 t P G I R t and H R t = t P R I R t, t [t R, ˆt](17) (HUKOU) Labour Mobility 2006 p. 25/41
3. Extending to Capture House Price Effects on Migration Across Regions General Equilibrium Before Hukou Removal [1] (Good Market Clearing) Y U + Y R = t U ˆt [2] (House Market Clearing) tu ˆt G U t dt + ˆt t R G R t dt; H U t dt = E U and ˆt t R H R t dt = E R ; [3] (Labour Market Clearing) L U + L R = L. After Hukou removal, all individuals have identical amounts labour in urban and rural areas, then labour is allocated such that L U = t U ˆt t U t R L and L R = ˆt t R t U t R L. (18) (HUKOU) Labour Mobility 2006 p. 26/41
3. Extending to Capture House Price Effects on Migration Across Regions Indirect Utility Functions V t (I U t ) = V t (I R t ) = { } 1 t { 1 t t P G P U { } 1 t { 1 t t P G P R } t It U, t [ˆt,t U ] (19) } t It R, t [t R, ˆt] (20) (HUKOU) Labour Mobility 2006 p. 27/41
3. Extending to Capture House Price Effects on Migration Across Regions The Time Cost of Living Index TCL(U,t) = [ {1 } 1 t { t t P G P U } t ] 1, t [ˆt,t U ](21) TCL(R,t) = [ {1 } 1 t { t t P G P R } t ] 1, t [t R, ˆt](22) (HUKOU) Labour Mobility 2006 p. 28/41
3. Extending to Capture House Price Effects on Migration Across Regions Money Metric Measure of the relative valuation of a unit of income across the two regions TCL(U, ˆt) TCL(R, ˆt) = [ PU P R ]ˆt The Equilibrium Migration Condition migration must satisfy changes from the model with no house price effects W U = TCL(U, [ ]ˆt ˆt) W R TCL(R, ˆt) = PU. (23) P R (HUKOU) Labour Mobility 2006 p. 29/41
3. Extending to Capture House Price Effects on Migration Across Regions General Equilibrium After Hukou Removal [1] (Good Market Clearing) Y U + Y R = t U ˆt G U t dt + ˆt t R G R t dt; [2] (House Market Clearing) t U ˆt Ht U dt = E U and ˆt t R Ht R dt = E R ; [3] (Labour Market Clearing) L U + L R = L; [ ]ˆt [4] (Migration Condition) W U P W R = U P R. (HUKOU) Labour Mobility 2006 p. 30/41
3. Extending to Capture House Price Effects on Migration Across Regions In Table 8, the equilibrium prices before Hukou removal are P G = 1.000000, P U = 1.000000 and P R = 1.000000 and the equilibrium prices after Hukou removal are P G = 1.000000, P U = 1.646876 and P R = 0.418946 House prices rise in urban areas and fall rural areas. (HUKOU) Labour Mobility 2006 p. 31/41
3. Extending to Capture House Price Effects on Migration Across Regions In Table 7. General Equilibrium Model without House Prices Labour Migration = 387.059849 and Efficiency Gain = 1906.872070 In Table 8. General Equilibrium Model with House Prices Labour Migration = 311.799079 and Efficiency Gain = 1820.913595 (HUKOU) Labour Mobility 2006 p. 32/41
3. Extending to Capture House Price Effects on Migration Across Regions Labour flows under Hukou removal are smaller and significant further redistribution occurs between urban dwellers whose house prices rise and rural dwellers whose prices fall. Efficiency gains from Hukou removal tend to be smaller with house price effects since the number of migrants will be smaller. This model shows that urban house price rises retard rural-urban migration. (HUKOU) Labour Mobility 2006 p. 33/41
4. A Model with a Distribution of Productivities within Regions Table 5. Regional and National Gini Coefficients for Household Income in China from 1978 to 2000 Year Urban Areas Rural Areas Nation 1978 0.160 0.212 1979 0.160 0.241 1980 0.150 0.241 0.330 1981 0.150 0.232 1982 0.150 0.246 1983 0.160 0.244 1984 0.190 0.227 0.300 1985 0.190 0.304 (HUKOU) Labour Mobility 2006 p. 34/41
4. A Model with a Distribution of Productivities within Regions Table 5. Regional and National Gini Coefficients for Household Income in China from 1978 to 2000 Year Urban Areas Rural Areas Nation 1986 0.200 0.305 1987 0.230 0.303 1988 0.230 0.310 1989 0.230 0.310 1990 0.240 0.307 1991 0.250 0.313 1992 0.270 0.329 1993 0.300 0.321 (HUKOU) Labour Mobility 2006 p. 35/41
4. A Model with a Distribution of Productivities within Regions Table 5. Regional and National Gini Coefficients for Household Income in China from 1978 to 2000 Year Urban Areas Rural Areas Nation 1994 0.280 0.342 0.400 1995 0.280 0.323 0.415 1996 0.290 0.329 0.424 1997 0.300 0.337 0.425 1998 0.295 0.336 0.456 1999 0.457 2000 0.320 0.458 (HUKOU) Labour Mobility 2006 p. 36/41
4. A Model with a Distribution of Productivities within Regions ble 6. Effects of Hukou Elimination on Regional and National Gini Coefficients and Theil Measures of Inequality Urban - Rural Rich - Poor EC - CW EC - WD E - C - W Gini Coefficients before Hukou Removal G U = 0.3200 G R = 0.4094 G EC = 0.4119 G EC = 0.4186 G E = 0.4226 G R = 0.3500 G P = 0.2030 G CW = 0.2040 G WD = 0.1600 G C = 0.1440 G W = 0.1600 G = 0.4600 G = 0.4600 G = 0.4600 G = 0.4600 G = 0.4600 Gini Coefficients after Hukou Removal G U = 0.357188 G R = 0.423638 G EC = 0.397921 G EC = 0.224439 G E = 0.254828 G R = 0.368747 G P = 0.169154 G CW = 0.112343 G WD = 0.181277 G C = 0.189328 G W = 0.113556 G = 0.370538 G = 0.373878 G = 0.347042 G = 0.229139 G = 0.259639 (HUKOU) Labour Mobility 2006 p. 37/41
4. A Model with a Distribution of Productivities within Regions Urban - Rural Rich - Poor EC - CW EC - WD E - C - W Theil Measures before Hukou Removal T U = 0.171850 T R = 0.291932 T EC = 0.285837 T EC = 0.173458 T E = 0.122389 T R = 0.203112 T P = 0.078384 T CW = 0.102791 T WD = 0.118314 T C = 0.075694 T W = 0.070750 T 1 w = 0.185971 T w = 0.196142 T w = 0.212126 T w = 0.123277 T w = 0.043293 T 1 b = 0.064300 T b = 0.084295 T b = 0.065885 T b = 0.035041 T b = 0.069722 T = 0.250270 T = 0.280437 T = 0.278010 T = 0.158318 T = 0.113015 Theil Measures after Hukou Removal T U = 0.224532 T R = 0.315792 T EC = 0.256137 T EC = 0.096899 T E = 0.136043 T R = 0.234890 T P = 0.063729 T CW = 0.025677 T WD = 0.077606 T C = 0.083320 T W = 0.025021 T 1 w = 0.226873 T w = 0.233030 T w = 0.186570 T w = 0.094884 T w = 0.115340 T 1 b = 0.009734 T b = 0.010959 T b = 0.010367 T b = 0.002850 T b = 0.010194 T = 0.236607 T = 0.243990 T = 0.196937 T = 0.097735 T = 0.125534 (HUKOU) Labour Mobility 2006 p. 38/41
5. Conclusions and Remarks This paper uses two model variants to study the impacts of the Hukou system of permanent registration on income inequality and labour income migration in China. (1) The base model is taken from Hamilton and Whalley (1984). We evaluate the impacts of cross region labour migration restrictions on national inequality. (2) A second house model captures the effects of higher urban house prices in retarding rural labour movement in to urban areas. (HUKOU) Labour Mobility 2006 p. 39/41
5. Conclusions and Remarks All model results point towards a significant role of the Hukou system in preventing movement towards a more equal distribution of income in China. The effects are smaller in the latter two model variants than in the first. We see all models as a simplification from a more complex reality, and so we do not aim to provide from point estimate of impact. We offer new methodological approaches which can be used for the analysis of other economies with mobility restrictions. (HUKOU) Labour Mobility 2006 p. 40/41
Thanks This paper is to appear in Journal of Development Economics. (HUKOU) Labour Mobility 2006 p. 41/41