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《Journal of Finance and Economics》 2018-02
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The Impacts of Distortion and Relaxation of the Hukou System on Chinese Economy:Theory and Evidence

Yang Pu;Liu Jun;Chang Wei;Research Institute,Huajin Securities Co.,Ltd;School of Finance,Shanghai University of Finance and Economics;  
In order to promote long-term economic development,on the one hand,we could increase the technology level or the quantity and quality of capital and labor input,on the other hand,we could enhance the disposition efficiency by reducing the friction of factor flow.At present,the labor force in China has reached the ceiling,but with the development of the economy,the non-agriculture sectors have the increasing demand for labor force.The hukou system is the main obstacle to labor flow in China,and an increase in labor supply in non-agriculture sectors by a reduction in the friction of labor flow from rural to urban areas through the reform of hukou system is very important for achieving the long-term goal of keeping high-speed economic development.Is the distortion of the hukou system high or low? What is the impact of the relaxation of hukou system on the economy? The answers to these questions are helpful for the governments to evaluate the space and economic benefits of the reform of hukou system,and provide guide for the ongoing reform of hukou system.Based on the two-sector labor flow model of Hansen and Prescott(2002),this paper divides workers into agriculture and non-agriculture ones,introduces distortion factors,and then constructs a hukou distortion model with two sectors and two classes of workers.Using the macroeconomic data between 1984 and 2013,this paper measures the hukou distortion degree,simulates the change process of economic variables such as employment,wage rates,added value and social capital in 2013 when the hukou system has been gradually relaxed after taking the South Korea as a reference.It gives the answers to the research questions.Moreover,through an extension of the benchmark model,this paper provides a theoretical framework to study the influences of the hukou system,by constructing a provincial heterogeneous hukou distortion model with hukou differences in "agriculture and non-agriculture" sectors and "local and non-local" hukou differences.It comes to the following conclusions:firstly,due to synchronization of economic reform and hukou reform,the hukou distortion degree in China is presented in the inverted U-shape form,and has much room for improvement compared with South Korea.Secondly,if the hukou system is fully relaxed in 2013 after taking South Korea as a reference,the employment in agriculture and non-agriculture sectors will decrease by58.83% and increase by 26.92% respectively,the wage rate will increase by 19.44% and decrease by 6.77% respectively,and the social added value will increase by 15.33%.The growth of social added value indicates the promotion of social and economic efficiency,and shrinking wage gap between these two sectors indicates that the gap between rural and urban areas has been narrowed.The conclusions of this paper provide important enlightenment for the reform of hukou system in China.It is mainly reflected in the following aspects:firstly,after 2006,the degree of household registration distortion in China has not been improved greatly,and the rising prices in cities are restricting the transfer of labor from rural to urban areas and from less-developed to developed cities.Secondly,a reduction in restrictions on hukou system helps to slow down the trend of labor force flow inversely from first or second tier cities to third or fourth tier cities and from towns to rural areas since 2016.Thirdly,the formulation of hukou system reform policies to reduce the social welfare gap between agriculture and non-agriculture households can solve the problem of labor shortage in non-agriculture sectors effectively.The theoretical contributions of this paper are as follows:firstly,by dividing workers into agriculture and non-agriculture ones,and introducing hukou distortion factor,this paper constructs a hukou distortion model with two sectors and two classes of workers.The model can better measure the hukou distortion degree and evaluate the influence of the hukou system on the economy.Secondly,it establishes a provincial heterogeneous hukou distortion model with ‘agriculture non-agriculture' and ‘local non-local' differences,and provides a theoretical framework for discussing the impact of these two distortions on the economy.The practical contributions are as follows:firstly,the measurement of the hukou distortion degree and the analysis of the reason for the evolution process are of great significance for the governments to make hukou system reform policies.Secondly,it simulates the changes in economic variables in agriculture and non-agriculture sectors in the process of relaxing the hukou distortion degree and evaluates the economic benefits brought by relaxing hukou system,providing theoretical basis for further hukou system reform in China.
【Fund】: 国家自然科学基金项目(71773072 71773073 71473157)
【CateGory Index】: D631.42;F124
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