Rural Pensions, Labor Reallocation, and Aggregate Income: An Empirical and Quantitative Analysis of China

This paper asks why so much labor stays in low-productivity agriculture in developing countries, and treats the county-by-county rollout of China’s New Rural Pension Scheme (NRPS) between 2009 and 2012 as a policy experiment that lowers the cost of leaving the farm. Using an annual panel covering roughly 80,000 rural individuals in 350 villages from 2003 to 2013, and instrumenting employment in the urban non-agricultural sector with the interaction of a county’s NRPS rollout and the presence of a pension-eligible household member aged 60 or above, the authors estimate that young workers in eligible households become 4.2 percentage points more likely to work in the urban non-agricultural sector; that the daily wages of these NRPS-induced migrants are 86 log points higher, which the paper reads as the average migration cost the switchers had been facing; and that for the average worker the underlying sectoral productivity difference is 33 log points, close to the 31-log-point cross-sectional gap, implying that worker sorting accounts for only a minor part of China’s observed agricultural productivity gap. The authors then build and structurally estimate a general-equilibrium household model in which old and young members of a rural family play a non-cooperative Nash game over farm work and shared home production, and in which older workers hold a comparative advantage in home production; in that model the NRPS raises migrants’ labor supply by 6% and GDP by 2.4% while cutting the labor supply of elderly rural workers by 34%, and aggregate welfare measured in consumption-expenditure equivalents rises by 15%. Counterfactuals show that the pension’s positive effects survive even when migration costs are made much lower, that scaling the transfer up fivefold would raise GDP by a further 4.2% and welfare by a further 28.5%, and that the GDP gain from the NRPS is comparable to that from giving every destination city the most liberal household-registration (hukou) policy observed in the data — though the two policies work through different margins, the pension mainly by correcting labor misallocation inside the household and raising aggregate labor supply, the hukou reform by reallocating labor between sectors. All of this is estimated for rural Chinese workers aged 20 to 55 with no more than 12 years of schooling over 2003 to 2013, and the paper is explicit that a further, separate productivity gap between migrants and urban residents (a wage ratio of about 2.8 to 1 in the calibrated 2013 baseline) limits the gains migration can deliver.

Bingjing Li | Macro Paper Warehouse

Rural Pensions, Labor Reallocation, and Aggregate Income: An Empirical and Quantitative Analysis of China