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The Human Factor: China’s Internal Migration and the Saving Puzzle

Sep 2015
Working Paper
Hou Wang, Yi David Wang, Jiaxiong Yao
Filling a gap left by previous literature, this paper finds that many macroeconomic “puzzles” exhibited by the Chinese economy can be explained (at least partially) by the evolution of China’s internal-migration policies. Such policies not only have a profound impact on China’s labor market conditions, but also explain many China-specific phenomena such as its rising saving rate, persistent and increasing wage gap, and seemingly constant rate of urbanization that are contrary to the implications of traditional macroeconomic models. In this paper, we introduce a theoretical framework capturing how human-migration policies are formed by the authorities while retaining the main features and assumptions of traditional models. We show that by incorporating the government’s decision in the theoretical framework, the model generates sensible implications consistent with Chinese data, hence adds to our understanding of the existing ”puzzles.” More importantly, we do not require the assumption that Chinese economic agents simply have different preferences than western agents but instead explain the puzzles as a natural outcome when the same agents face different policy constraints. Finally, by examining the experience of other economies in the past, the paper reveals that China’s experience is not as unique as it initially seems and suggests an optimal path for migration-policy evolution. In particular, China should relax its migration barriers going forward and maintaining the Hukou system beyond the next decade would be detrimental to China’s growth targets and urbanization goals.
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