Trade, migration and productivity: A quantitative analysis of China

Abstract

This Version: May 2015 (Please contact us for the latest version if you plan to cite the paper) In this paper we study costs of goods and labour flows as a soure of labour mis-allocation both across regions and across firms and sectors within a region. We de-velop a general equilibrium model of internal and external trade with worker selection across locations and costs to both trade and migration. We estimate these costs using unique data on China’s trade and migration and quantify the aggregate productivity and welfare losses generated by these frictions. The costs were high in the early 2000s, but declined afterwards. We quantify the consequences of these declines and find the reduction in trade and migration costs accounts for 36 % of China’s aggregate GDP growth between 2002 and 2007. We also find that reduction in internal trade costs and migration costs dominate external trade liberalization as a source of aggre-gate productivity growth and welfare gains between 2002 and 2007. Finally, despite some decline, migration cost in China are still very high and China would see very