Housing prices raise wages: Estimating the unexpected effects of land supply regulation in China

•Under China's construction land use quota system, land supply has been restricted in the coastal area which the migrants are heading for.•Housing prices have risen more significantly in coastal China than in the inland.•Wages have risen in accordance with housing prices in coastal China, and undermined China's economic competitiveness.•Land policy should be reformed to increase land supply in the cities where population growth is faster.

China is currently experiencing rapid rises in labor cost. Since 2003, the central government has increased the share of land use quotas allocated to the central and western regions to support their development. As a result, the relative decline in land supply in the eastern regions has raised housing prices and consequently increased wages, damaging the competitiveness of the Chinese economy. On the basis of city-level panel data from 2001 to 2010, we used the per capita land supply as the instrument variable for housing prices and analyzed the sub-samples along the border between the inland and the eastern regions. We found that land supply policies have led to the rapid growth of housing prices and increased wages in the cities where land supply has been restricted, mainly in eastern region. This study indicates that regardless of the geographical advantages of the east region, land supply policies have had a negative impact on the efficiency and competitiveness of the Chinese economy.