Labour reallocation, productivity growth and dualism: The case of China

Building upon Temple and Wöβmann (2006), we propose a three-sector model to identify the role of labour reallocation to the growth of total factor productivity (TFP) in China since the 1980s. Based on System Generalized Methods of Moments (GMM) dynamic panel data models and a newly-developed provincial human capital stock dataset, our results show that labour reallocation from agriculture to rural non-agriculture is more important than the urban counterparts to output growth and that this effect is more evident in coastal areas of China. Implications of structural transformation for other populous developing economies are discussed.