Fiscal Decentralization, Rural Industrialization, and Undocumented Labor Mobility in Rural China (1982-87)

This paper explores the relationship between fiscal decentralization, which gave greater rural industrialization and fiscal authority to local governments, and the emergence of rural–rural undocumented inter-provincial labour migration during China’s initial reform period. A Heckman model is employed to correct for the zero observation problems and to estimate consistently the labour mobility with a modified gravity equation. Given the institutional barriers, the fiscal decentralizationhas two contending effects on labour market integration: local economic development promotes labour mobility, but local public goods crowding restrains the inflow of labour at the destination. The crowding effect is stronger at lower levels of government.