Joint SOSC/ECON Seminar - Migration Costs, Sorting, and the Agricultural Productivity Gap

We use a unique panel dataset and a policy experiment as an instrument to estimate the impact of policy-induced migration cost reductions on rural-urban migration and the associated increase in labor earnings for migrant workers in China. Our estimation shows that the observed labor earnings gap between agriculture and non-agriculture is mainly due to large migration costs and a large underlying productivity difference between the two sectors. Sorting plays only a minor role in accounting for the observed sectoral earnings gap. We also structurally estimate a general equilibrium Roy model to quantify the effects of reducing migration costs. A policy reform that sets the hukou liberalization index in all regions of China to the level of the most liberal region would reduce the observed agricultural productivity gap by 23%, increase the migrant share by 6%, and increase the aggregate productivity by 2%.