China initiated its reform and opening-up policy in 1978. At the time, the Chinese economy had experienced low growth and aimed to expand opportunities and open markets in order to stimulate economic growth. The relative concentration of opportunities in new markets in Specialize Economic Zones within China led to concentrations of human capital, which in turn led to concentrations of resources in particular regions, such as Shenzhen, Shanghai, or Beijing. This resource centralization occurred in urban areas, whereas places with few resources tend to be rural. The Rural– urban differences in China have persistently accounted for a large share of income inequality.

According to recent calculations by the World Bank, rural–urban differences accounted for 40 percent of total income inequality in 2003, percentages similar to those of 1995. Changes in rural–urban inequality accounted for 47.4 percent of the increase in inequality between 1985 and 1995, contributing more to inequality than interprovincial, intra-rural, or intra-urban inequality (World Bank 1997). Sicular and others (2006) find that rural–urban differences explained 25 percent of overall inequality in 2002 across a range of provinces. These inequalities lead to the persistence of poverty, disease, and lower standard of living within rural areas. By identifying the causes underlying limitations to rural economic growth, we can begin to develop targeted policies to redress these problems. This paper argues that rural and urban wage differentials can be explained largely by differences in education, labor mobility, and investment across these two areas.

Quality education is essential to society’s ability to boost economic growth. A big gap exists in Chinese society between rural and urban areas when it comes to educational allocation. In China, educational resources are allocated in urban regions, whereas rural areas receive far less educational support. The China Health and Nutrition Survey, which drew data from eight provinces, showed that urban workers spend 11.0 years and rural workers 6.6 years in school respectively (Shi, Sicular, and Zhao 2002). The 2000 census showed that urban enrollment rates ranged from 93 to 95 percent, while rural enrollment rates ranged from 84 to 90 percent (Hannum, Wang, and Adams 2006). The differentials are even larger for secondary school children, who are enrolled at rates of between 72 and 80 percent in urban areas and between 50 and 64 percent in rural areas (Hannum, Wang, and Adams 2006). This has led to differentials in human capital attainment across theses spaces, hindering economic growth in rural regions. When it comes to administering quality education, China's nine-year compulsory education rule hasn't been properly implemented across many impoverished rural areas, “mainly because poor families are unwilling or unable to pay the necessary school fees.” (Park 2008) This only further increases inequities that result from the more limited funding of education and health services resulting from fiscal decentralization (Tsang 1994, 2002). Without sufficient or basic educational resources directed towards supporting the impoverished, differentials in human capital across the two spaces are inevitable. This imbalance creates a feedback loop only further entrenching differences across rural and urban areas.

According to basic economic theory, models of free labor and costless labor mobility dictate that wages will reach equilibrium across geographies to the point where labor supply and demand equalizes. Such models assume that salaries for workers with the same human capital converge throughout labor markets given the ability of workers to move across space without impediment. If this is the case, inequalities in incomes between rural and urban areas should reflect variations in labor productivity. According to Sicular, 50 percent of the rural-urban gap is explained by differences in the observable features of residents in rural and urban areas, with 25% of the difference accounted for by schooling (Sicular 2006). Once the perfect labor market assumptions are relaxed, labor mobility may be hindered by the costs of moving, by the inability to find information concerning potential opportunities, or by preferences for remaining in one’s home. Finally, for the poorest, economic constraints may limit the ability to move.

In China, the hukou system, which requires individuals to register their residency in certain locations in order to qualify for state benefits and services, acts as a further barrier to labor mobility, segmenting labor markets spatially. The hukou system limits the rights of Chinese to move and settle anywhere in China outside of where they were born. Workers are obligated to contribute to the national social security system, which provides health, education, pensions, and other benefits, regardless of where they reside. However, they are only able to take advantage of these funds if their hukou matches their current place of residency. These theoretically beneficial policies fix residents in spaces regardless of their economic potential, raising the costs of migrating elsewhere. For hundreds of millions of impoverished Chinese, this has reduced the ability to access social spending even as individuals pay taxes to support local governments. As Sicular has shown, when labor mobility is frictionless or encouraged, the difference in marginal productivities and earnings between rural and urban areas is much smaller. For example, although there were significant salary gaps between rural and urban areas during the initial period of the Industrial Revolution, these gaps eventually closed as more workers shifted from agriculture to industry by moving into urban areas (Caselli and Coleman 2001; Hayami 2001). Looking to the US example, rural-urban labor shifts from the South of the United States are credited with reducing rural-urban wage disparities as well as North-South wage inequalities (Caselli and Coleman 2001). As a result, rural-urban marginal productivities (and thus wages) will not be equalized without more permissive systems encouraging labor mobility in China.

Chinese investment across rural and urban areas is lopsided and uneven. Rural areas have received far less private investment—investment by private profit-seeking enterprises—compared to urban areas within China. In particular, private investment tends to cluster around larger consumer markets and benefit from agglomeration effects, incentivizing firms to develop investment strategies geared towards urban areas and increasing investment disparities across rural and urban spaces (Behrens, and Nicoud 2015). This leaves deficits that central governments are best placed to redress through targeted investment in rural areas, which can help spur economic growth and disrupt feedback loops that generate higher growth rates in urban spaces. The current economic gap between rural and urban spaces has continued to create large economic gaps, further resulting in differentials in productivity and wages. However, targeted investment by governments can make up for the lack of private investment, which can help redress rural-urban wealth differentials through investment in infrastructure, subsidies, and welfare programs that alleviate economic imbalances.

In particular, investment provides an opportunity to remedy existing imbalances across the educational system, while providing productivity boosts to rural areas. Given China’s strong economic growth, targeted investment is capable of alleviating poverty and remains key to future growth. Interestingly, the abundance of private investment in urban areas has encouraged labor mobility from rural regions. The hukou acts as a barrier preventing residents from moving to growing urban centers given the loss of future welfare benefits. In spite of these drawbacks, such as a lack of unemployment insurance if jobs are lost, farmers and laborers in rural regions still have the incentive to work in urban cities and tend to migrate to the urban cities to pursue a higher incomes and living standards. According to Fang and her colleagues, employment in TVEs (Township and village enterprises) increased from 28.3 million in 1978 up to 146.8 million in 2006, which accounted for 9.2% and 27.7% of rural labor forces in the two years respectively, even increasing more currently, which demonstrates the growth of labor mobility overtime. In part, this movement reflects the advantages of increased investment and becomes its own argument for targeted investment in rural areas.

Differences in education, restrictions in labor mobility, and uneven investment create negative feedback loops constraining rural economic growth in China. These aspects form a situation of inequity across rural and urban areas, which create large economic gaps. To redress the issue, targeted investment designed to alleviate gaps by building infrastructure, providing robust medical services, abundant welfare, and extra subsidies for rural areas. Since the Chinese reform and opening-up policy in 1978, there have been a tremendous number of opportunities for individuals and enterprises to discover new markets as China has developed. By interpreting the causes of the rural- urban differentials in education, labor mobility, and investment across these two areas, people can better redress and resolve the underlying circumstances, eliminate obstacles, and hasten the economic growth of Chinese society for the greater good.

Tinho Xiong is an incoming freshman at Georgetown Preparatory School who loves to burrow himself into economic-related events and activities. Tinho is a community-oriented student, who always adheres himself to the big community and is dedicated to contributing to society. 

Bibliography

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4. Park, Albert “Rural-Urban Inequality in China” in Yusuf, Shahid and Saich, Tony eds. China Urbanizes: Consequences, Strategies, and Policies. Washington: World Bank, 2008.