Labor market distortions, rural-urban inequality and the opening of China's economy

This paper evaluates the impact of some key factor market reforms on rural-urban inequality and income distribution, using a household-disaggregated, recursive dynamic computable general equilibrium (CGE) model of China. We also explore how these factor market reforms interact with product market reforms currently underway as part of China's WTO accession process. The simulation results show that the reforms in rural land rental market and Hukou system, as well as increasing off-farm labor mobility, would reduce the urban-rural income ratio dramatically. Furthermore, the combination of WTO accession and factor market reforms improves both efficiency and equality significantly.