Relaxing Hukou: Increased labor mobility and China's economic geography

China's Hukou system poses severe restrictions on labor mobility. This paper assesses the possible consequences of relaxing these restrictions for China's internal economic geography. We base our analysis on a new economic geography (NEG) model. First, we estimate the important model parameters using data on 264 of China's prefecture cities. Second, we use these estimates as inputs in a simulation of the full NEG model under different labor mobility regimes. We find that increased labor mobility leads to more pronounced core-periphery outcomes. Beijing, Shanghai, Guangzhou and Chongqing in particular will further strengthen their dominant place in China's urban hierarchy. In addition, two other groups of cities can be distinguished: those in China's populous heartland offering preferential access to China's enormous internal market, and more peripheral cities that are better shielded from competition with China's economic heartland by virtue of their relative remoteness.

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