Labor mobility barriers and rural-urban migration in transitional China

Rural-urban migration is an inherent component of urbanization and economic development. This paper develops a model of labor migration, focusing on the role of selection effects in determining labor market outcomes. The model is then calibrated to quantify the effects of China's labor market reforms on labor market outcomes, outputs, and income. Results find that the removal of legal labor mobility constraints and lowering of migration costs benefit the overall economy in terms of GDP and total welfare, but rural-urban migration also causes a brain drain in rural areas, and decreases agricultural production while inflating the price of agricultural products. In terms of inequality, migration narrows the urban-rural labor income gap, but when considering capital income, migration actually increases urban-rural inequality.