Labor Mobility within China: Border Effects on Interregional Wage Differentials

Labor migration is institutionally restricted within China under the hukou system, China's registration system. However, what is the pecuniary impact of labor immobility on interregional wage inequality? To answer this question, we derive a simple wage gap equation including educational attainment, market potential and provincial border indicators. The regressions based on city and sector-level data show that, other things being equal, the wage dispersions within Chinese provincial borders are significantly less pronounced than those among provinces. Such border effects on spatial wage differentials, which have been shown to pervasively exist in all sectors considered in the present paper, reflect the distortions generated by migration controls. Finally, we show that despite the recent hukou reforms aimed at relaxing the restrictions on population movement, border effects appear to persisted over the period 2003-2005.