Academic journal article Seoul Journal of Economics

Four Alternative Estimates of Surplus Labor and Their Influence on Urban-Rural Inequality in China

Academic journal article Seoul Journal of Economics

Four Alternative Estimates of Surplus Labor and Their Influence on Urban-Rural Inequality in China

Article excerpt

This study examines the effect of agricultural surplus labor on the urban-rural income gap in post-reform China. Using 29 Chinese provincial data from 1988 to 2011 and applying simultaneous equations, this study finds that surplus labor is an important factor for the increased inequality between urban and rural areas, and thus confirms Lewis's dual economy theoiy. Four different methods, namely, the classical method, international standard structure comparison, the sown-land-to-labor-ratio method, and the arable-land- to-labor-ratio method, are used to estimate agricultural surplus labor. Although the surplus labor forces estimated by the four methods significantly differ in their magnitudes (from 14 million to 80 million), their influence on urban-rural inequality is the same and robust. Provinces with more surplus labor have wider urban-rural income gaps, implying that the reduction of surplus labor is a fundamental means to reduce urban-rural inequality.

Keywords: Urban-rural inequality. Openness, Surplus labor, China

JEL Classification: J61, 015, 018, 033, Rl 1

I. Introduction

After 1949, when the People's Republic of China was inaugurated, Mao Zedong led class struggle campaigns and advocated an isolated economy and thereby eventually caused the decline of his political career. Mao's successor, Deng Xiaping, embraced the cat theory ("It does not matter if a cat is black or white for as long as it catches mice"), which was considered to represent a shift in Mao Zedong's way of thinking and an innovation (an open policy) and a practical political line that linked the market economy and the socialist-planned economy. Deng proposed this theory in 1978 during the 11 "'-term third Chinese Communist Party General Assembly as a part of his vision of China's economic growth. Thirty-frve years since. China has advanced with economic growth by shifting from an agricultural nation to an industrial nation.

China also proclaimed Xian Fun Lun. a theory that several Chinese nationals in certain areas should become rich first before they can lead other people and regions to become rich gradually. Under this theory, China has created economic zones in coastal cities and opened itself to the world.

To open itself to the world, China has introduced and utilized foreign capital, as well as foreign-developed technologies and management experiences, to create economic zones and economic development zones in coastal areas, to expand its external trade volume for increased earnings in foreign currencies, and to innovate its trade system to encourage local regions and corporations to boost their exports.

Economic reforms, which started with agricultural areas and with the opening up of China to the world, have gradually expanded into prompting state-owned enterprises in urban areas to innovate. This move gradually reduced planned economic areas and expanded market economy areas, indicating a shift to the market economy system.

China has had 35 years of remarkable achievements through innovation and its opening up to the world, but it is suffering from problems that include a wide gap in income among its people, regional differences in income and development, and a difference in development between rural and urban areas. Rapid economic growth has created problems, such as a wide gap in income among people in various nations, but China is suffering from more serious gaps in wealth among its people.

Starting from a low Gini coefficient for household income of 0.257 in 1984, China reached a high Gini coefficient for income of 0.403 in 1998 (UNU-WIDER, January 5. 2010) and of 0.474 in 2012 (National Bureau of Statistics of China. August 24, 2013), higher than the internationally accepted warning level of 0.4.1

Between 1984 and 2012, whereas the income share of the top quintile in the total income rose from 34.1% to 51.9%, that of the bottom quintile dropped from 10.1% to 4.3%. The middle class (Le. …

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