Barriers to labor mobility and international trade: The case of China

- I study how the removal of China's Hukou system could impact China and other countries.
- The Hukou system is modeled as a distortion to China's labor market.
- China's real GDP per capita could increase by 4.7% when Hukou is eliminated.
- Real GDP of Thailand could increase by 3.8%.
- Real GDP of Bangladesh, Sri Lanka, and Vietnam could decline by 2.7%, 3.2%, and 4.1%.

This paper quantitatively evaluates the potential impacts of removing China's Hukou system on the world economy. By denying migrant workers the right to health benefits and housing, China's Household Registration (Hukou) system presents a significant distortion to the Chinese labor market that discourages the reallocation of its labor from agriculture to non-agriculture. I find that the elimination of Hukou could increase China's real income per capita by about 4.7%. Moreover, although for most countries the impact of removing Hukou is modest (less than 1% changes in real income per capita), substantial changes in real income could take place for China's small neighboring economies. For example, the decreases in real GDP per capita are 2.7%, 3.2%, and 4.1% for Bangladesh, Sri Lanka, and Vietnam, while Thailand stands to enjoy a 3.8% increase in its income.