Incomplete Labor Market And Its Effect On Regional Income Disparity

While China has achieved great success in economic development in recent years, its domestic income inequality has also been widely concerned. Among all the factors that are related to regional income inequality in China, imperfect labor market should not be ignored. Owing to the household registration policy, labors are usually treated differently according to their education and skill level by the local government. Preferential policies are biased toward labors with high skill level, which made them easier to migrate across provinces. Through simple data analysis, we find that the mobility of high skilled labors is larger than their counterparts. Based on this characteristic, we build a theoretical model and have a systematic analysis on the relationship between imperfect labor market and income distribution under separate circumstances. Our theoretical model shows that capital mobility and capital accumulation would not lead to a persistent increasing regional income disparity. In the long run, income inequality would also not be completely eliminated and migration flows could be a stable phenomenon. Only through biased technical changes or endogenous technological progress would result in an even worse regional income disparity in the long run.