Migration, housing constraints, and inequality: A quantitative analysis of China

We investigate the role of migration and housing constraints in determining income inequality within and across Chinese cities. Combining microdata and a spatial equilibrium model, we quantify the impact of the massive spatial reallocation of workers and the rapid growth of housing costs on the national income distribution. We first show several stylized facts detailing the strong positive correlation between migration flows, housing costs, and imputed income inequality among Chinese cities. We then build a spatial equilibrium model featuring workers with heterogeneous skills, housing constraints, and heterogeneous returns from housing ownership to explain these facts. Our quantitative results indicate that reductions in migration costs and the divergent growth in productivity across cities and skills result in the observed massive migration to developed areas. Combined with tight land supply policies in big cities, the expansion of housing demand caused the rapid growth of housing costs and increased inequality between local housing owners and migrants. The counterfactual analysis shows that a migration-based land supply reform with regional transfers or a US-level property tax can lower within-city income inequality by 34% and 21%, respectively. Meanwhile, both reforms lower national income inequality by 20%. However, only the land supply reform encourages more workers to migrate to higher productivity cities.