Economic Transition and Private-Sector Labor Demand: Evidence from Urban China

Abstract

This paper studies the policy determinants of economic transition and estimates the demand for labor in the infant private sector in urban China. We show that a reform that untied access to housing in urban areas from working for the state sector accounts for more than a quarter of the overall increase in labor supply to the private sector during 1986-2005. Using the reform to instrument for private-sector labor supply, we find that private-sector labor demand is very elastic. We provide suggestive evidence that the reform equalized wages across sectors and reduced private-sector rents.