Sectoral asymmetries and a social-welfare interpretation of Hukou

- Sectoral asymmetries may imply different utilities for residents of different sectors.
- Optimal sectoral differences in utilities imply the need for restrictions on migration.
- Early on, China's Hukou restricted migration directly which could be optimal.
- Later on, modified Hukou restricted access to education and health by migrants.
- Modified Hukou produced sub-optimal urban floating populations without services.

The Hukou system's restriction of Chinese internal migration is controversial. This paper models internal migration in a dual economy and assesses the social welfare consequences of the Hukou system. It contrasts the effects of absolute prohibition of migration with the mere exclusion of migrants from certain services such as health care and education. Asymmetries between the rural and urban sectors mean that optimality may require different levels of utility in the two sectors. The existence of a floating population, however, is inconsistent with an optimal labor allocation.