Rural Pensions, Labor Reallocation, and Aggregate Income: An Empirical and Quantitative Analysis of China

Abstract

<p>We exploit the implementation of a rural pension policy in China to estimate the average</p><p>rural-to-urban migration cost for workers affected by the policy and the average</p><p>underlying sectoral productivity difference. Our estimates, based on a large panel data</p><p>set, reveal significant migration costs and substantial sectoral productivity differences,</p><p>with sorting playing a minor role in accounting for sectoral labor income gaps.We construct</p><p>and structurally estimate a general equilibrium household model with endogenous</p><p>labor supply and migration. The results of this model align with the reduced-form</p><p>findings and illustrate how the rural pension policy influences migration, GDP, and</p><p>welfare through improving within-household labor allocation. Counterfactual analyses</p><p>based on the model show that the positive effects of the policy remain even if migration</p><p>costs were significantly lower, and that scaling up the rural pension policy would lead</p><p>to even larger improvements in labor allocation, GDP, and welfare.</p>