Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/71711 
Year of Publication: 
2013
Series/Report no.: 
IZA Discussion Papers No. 7278
Publisher: 
Institute for the Study of Labor (IZA), Bonn
Abstract: 
This paper constructs a theoretical labor market model for China, and utilizes the model to examine the effects of various labor market policies on economic well-being. Two key features of the model are a segmented labor market involving three sectors - state-owned enterprises, private enterprises, and agriculture - and China's unique household registration system (hukou). The major existing theoretical models of employment and development - the Lewis model, the integrated labor market model, the Harris-Todaro model, and various segmented labor market models - stylize different developing countries' labor markets in other ways but do not include these two key features. The paper first formulates the equations of the model, then obtains a closed form solution given initial conditions, and then deduces the labor market and welfare consequences of several policy interventions, which include promoting rural development, reducing the cost-of-living in urban areas for rural hukou holders, and offering some rural workers the chance to convert from rural to urban hukou status. These policy interventions are analyzed using two alternative welfare criteria: first-order stochastic dominance and an abbreviated social welfare function. Using both social welfare criteria, it is shown that the rural development policy is unambiguously welfare-improving, while the other two policies have ambiguous effects on social welfare. None of these policies is unambiguously welfare-decreasing.
Subjects: 
labor markets
employment
welfare economics
China
hukou
JEL: 
I3
J2
O1
O53
Document Type: 
Working Paper

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