The Local Labor Market Effect of Relaxing Internal Migration Restrictions: Evidence from China

Abstract

Internal migrants account for 10.8% of the world population today and are expected to cause substantial distributional effects between themselves and native residents in rapid urbanizing countries. In this paper, we study how a significant relaxation of internal migration restrictions affects labor market outcomes of both incumbent migrants and natives, exploiting the 2014 Hukou reform in China. This reform substantially removed the migration barriers of cities with an urban population below 5 million (non megacities) but kept the migration barriers in megacities almost unchanged. Using a difference in differences method, we find migrants‘ wages in non megacities experience approximately a 7.3% decline relative to that in megacities after the policy shock. The negative effects are stronger among older, less educated, and blue collar incumbent migrants. By contrast, the policy change has non-negative impacts on the wages and labor participation rates of the natives in non-megacities. These results suggest the downward wage pressure imposed by an inflow of migrants falls primarily on incumbent migrants rather than on natives.

Keywords: hukou system, internal migration, migration restriction, labor market outcome

JEL Classification: J31, J61, J68