Barriers to labor mobility and international trade: The case of China

This paper quantitatively evaluates the potential impacts of removing Chinaʹs Hukou system on the world economy. By denying migrant workers the right to health benefits and housing, Chinaʹs Household Registration (Hukou) system presents a significant distortion to the Chinese labor market that discourages the reallocation of its labor from agriculture to non-agriculture. I find that the elimination of Hukou could increase Chinaʹs real income per capita by about 4.7%. Moreover, although for most countries the impact of removing Hukou is modest (less than 1% changes in real income per capita), substantial changes in real income could take place for Chinaʹs small neighboring economies. For example, the decreases in real GDP per capita are 2.7%, 3.2%, and 4.1% for Bangladesh, Sri Lanka, and Vietnam, while Thailand stands to enjoy a 3.8% increase in its income.