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Learning in Chinese Cities:
Do Rural Migrants Benefit from Labor
Market Agglomeration Economies?
Shihe Fu
Fulbright Visiti...
2
Outline
 Background: Why do cities exist
• business agglomeration economies
• labor market agglomeration economies
 Re...
3
Why Do Cities Exist? An Economics
Approach
 Cities are areas with high-density population
(or concentration of people a...
4
Firm Side: Business agglomeration
economies
 Localization Economies: the benefit from the
concentration of same-industr...
5
Micro-foundations of Localization
Economies
 Sharing
• sharing inputs: highways, public utility,
airport
 Pooling
• co...
6
Dynamic Localization Economies
 Industries with strong localization economies
tend to grow fast (Marshall, 1920)
 In t...
7
Urbanization Economies
 Benefits from the general level of city economy.
Measured by city size (population).
(Hoover, 1...
8
Micro-foundations of Urbanization
Economies
 Sharing
 Pooling
 Learning
• Jacobs: Cross-industry fertilization
promot...
Worker Side: Labor Market
Agglomeration Economies
 Benefit from the concentration of employment
 Labor market localizati...
Urban Wage Premium
 Labor market agglomeration economies can
improve workers’ matching and learning, therefore
help enhan...
Micro-foundations of Labor Market
Agglomeration Economies
 Labor market pooling:
• Improve matching between workers and f...
When an industry has thus chosen a locality for itself, it
is likely to stay there long: so great are the advantages
which...
13
Most of what we know we learn from other people. We
pay tuition to a few of these teachers, either directly or
indirect...
Empirical Evidence for Labor Market
Agglomeration Economies
 Extensive empirical evidence on urban wage
premium: Glaeser ...
Research Questions
 Do Marshallian externalities exist in
Chinese cities?
 And if so, how large is the magnitude?
 Do r...
Research Motivation
 Massive rural-urban migration of low-skilled
workers.
 Regulations on urban growth: institutional
b...
Why Focus on Labor Market Marshallian
Externalities?
 Mitigate the problem “productive workers
select into cities”
 Aggl...
Main Findings
 There exist Marshallian externalities in the
urban labor market in China
 Rural migrants also benefit fro...
Data
 2004 Manufacturing Census data: total
employment in each firm, by education
 2005 inter-census population survey (...
Key Variables of Agglomeration
 log(Emp): total employment in a city-
industry, measuring labor market pooling
effect
 C...
Model
effectfixedindustry:
effectfixedcity:
cityinindustryinsharecollege:
cityinindustryinemploymenttotal:
..)education.ag...
Causal Identification
 Two observationally identical workers (A and B)
working in the same industry in two identical
citi...
Existence of labor market agglomeration economies
baseline industry occupation occuindu
Urbanhukou 0.0297*** 0.0375*** 0.0...
 Weak evidence from labor market pooling
 Subsamples: sorting bias not serious
 Significant human capital externalities...
Rural migrants benefit from Marshallian externalities
baseline
Migrant
year<=2.5
Migrant
year>2.5 Age<=26 Age>26
Log(Emp) ...
Rural migrants benefit less from agglomeration economies
1 2 3 4 5 6 7
full
sample
Rural
migrants
Urban
hukou
Local
hukou
...
Possible Interpretation
 Work in informal job sectors that have fewer
spillovers?
 Low-skilled, low absorptive capacity?...
High-skilled workers benefit less if they are rural
1 2 3 4 5 6
Low
skilled
High
skilled
Low
skilled
U/R
High
skilled
U/R
...
Low / high-skilled worker sample
Full sample Low-skilled High-skilled
Log(Emp) 0.012* 0.008 0.018***
Log(Emp)*urban*migran...
Other Studies Suggest Double
Discrimination
 Zax (2016): returns to education vary
significantly and persistently across
...
Other Studies Suggest Double
Discrimination
 Liu et al. (2016): rural migrants are
residentially segregated in Shanghai, ...
(.9,1]
(.8,.9]
(.65,.8]
(.5,.65]
(.4,.5]
[0,.4]
Local Ratio in Shanghai(2010)
(0.750,1.000]
(0.550,0.750]
(0.350,0.550]
(0...
Conclusion
 Labor market agglomeration economies
exist in Chinese cities
 Rural migrants benefit from labor market
agglo...
Implications
 What drives rural-urban migration and
urbanization? Cities facilitate learning
 Learning in cities through...
How Can Chinese Cities Attract Skilled
People?
 Make cities safe
 Make cities clean: air quality
 Make cities accessibl...
Future Research
 Identify how people socially interact in
cities
 Test how relaxing or removing mobility
barriers enhanc...
Thanks for your attention!
Comments are very welcome.
shihefu@mit.edu
Learning in Chinese Cities: Do Rural Migrants Benefit from Labor Market Agglomeration Economies?
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Learning in Chinese Cities: Do Rural Migrants Benefit from Labor Market Agglomeration Economies?

Cities facilitate learning and human capital accumulation. In a dense, local labor market, workers can benefit from knowledge spillovers and therefore enhance their productivity. This is supported by many empirical studies from developed countries. Less is known in cities in developing countries. Using micro data from the 2004 manufacturing census and 2005 population census in China, we find that overall workers benefit from labor market pooling and knowledge spillovers in Chinese cities but rural migrants benefit much less than do local urban residents. This is not because rural migrants are low skilled or work in informal sectors. This may be because they lack social network and suffer “double discrimination” for being “rural” and being “migrant.” Our findings suggest that social interactions in cities provide a channel of learning alternative to formal schooling. Our findings also have policy implications on how Chinese cities can become “skilled” during the rapid urbanization process coupled with global competition.

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Learning in Chinese Cities: Do Rural Migrants Benefit from Labor Market Agglomeration Economies?

  1. 1. Learning in Chinese Cities: Do Rural Migrants Benefit from Labor Market Agglomeration Economies? Shihe Fu Fulbright Visiting Scholar at CRE, MIT Southwestern University of Finance and Economics STL China Talk Series October 17 2016
  2. 2. 2 Outline  Background: Why do cities exist • business agglomeration economies • labor market agglomeration economies  Research questions and motivation  Data and methodology  Results  Policy implications and future research
  3. 3. 3 Why Do Cities Exist? An Economics Approach  Cities are areas with high-density population (or concentration of people and firms in limited geographic areas)  The benefits of such concentration are called agglomeration economies  The reason why cities exist
  4. 4. 4 Firm Side: Business agglomeration economies  Localization Economies: the benefit from the concentration of same-industry firms in a city • Silicon Valley, Route 128, Detroit  Urbanization Economies: the benefit from the concentration of different-industry firms in a city • New York City Hoover (1937) (Location Theory and the Shoe and Leather Industries)
  5. 5. 5 Micro-foundations of Localization Economies  Sharing • sharing inputs: highways, public utility, airport  Pooling • concentration of firms and workers facilitates matching and reduces search costs  Learning • information or knowledge spillovers  Specialization; Competition
  6. 6. 6 Dynamic Localization Economies  Industries with strong localization economies tend to grow fast (Marshall, 1920)  In the dynamic context, localization economies is dubbed Marshallian externalities • Marshallian-Arrow-Romer (MAR) externalities (Glaeser et al., 1992) (Growth in cities, JPE)
  7. 7. 7 Urbanization Economies  Benefits from the general level of city economy. Measured by city size (population). (Hoover, 1937, 1971) , Henderson (1986)  Benefits from overall local urban scale and diversity (Henderson et al., 1995)  Benefits from industrial diversity  In dynamic context: Jacobs externalities, • Glaeser et al. (1992) • Jacobs (1961,1969): The Death and Life of Great American Cities
  8. 8. 8 Micro-foundations of Urbanization Economies  Sharing  Pooling  Learning • Jacobs: Cross-industry fertilization promotes innovation and urban growth  Economies of scope
  9. 9. Worker Side: Labor Market Agglomeration Economies  Benefit from the concentration of employment  Labor market localization economies: • Benefits from concentration of workers in the same industry (occupation) in a city. • In dynamic context, Marshallian externalities in labor markets  Labor market urbanization economies: • Benefits from concentration of workers in different industries (occupations) in a city. • In dynamic context, Jacobs externalities in labor markets.
  10. 10. Urban Wage Premium  Labor market agglomeration economies can improve workers’ matching and learning, therefore help enhance skills and accumulate human capital  Workers’ productivity will be higher in larger cities  Wages will be higher in larger cities: urban wage premium
  11. 11. Micro-foundations of Labor Market Agglomeration Economies  Labor market pooling: • Improve matching between workers and firms; reduce search friction; increase labor mobility  Knowledge spillovers (human capital externalities) through social interactions • Formal communications (Charlot and Duranton, 2004) • Informal social interaction (social networking) • Poaching • Peer effect
  12. 12. When an industry has thus chosen a locality for itself, it is likely to stay there long: so great are the advantages which people following the same skilled trade get from near neighbourhood to one another…if one man starts a new idea, it is taken up by others and combined with suggestions of their own; and thus it becomes the source of further new ideas. And presently subsidiary trades grow up in the neighbourhood, supplying it with implements and materials, organizing its traffic, and in many ways conducing to the economy of its material. Marshall (1920): Principles of Economics, Book IV, Chapter 10 The Concentration of Specialized Industries in Particular Localities
  13. 13. 13 Most of what we know we learn from other people. We pay tuition to a few of these teachers, either directly or indirectly by accepting lower pay so we can hand around them, but most of it we get for free, and often in ways that are mutual - without a distinction between student and teacher. … We know this kind of external effect is common to all the arts and sciences - the 'creative professions'. All of intellectual history is the history of such effects. But, as Jacobs has rightly emphasized and illustrated with hundreds of concrete examples, much of economic life is 'creative' in much the same way as is 'art' and 'science‘… What can people be paying Manhattan or downtown Chicago rents for, if not for being near other people? Lucas (1988): On the mechanism of economic development
  14. 14. Empirical Evidence for Labor Market Agglomeration Economies  Extensive empirical evidence on urban wage premium: Glaeser and Mare (2001), Moretti (2004), Rosenthal and Strange (2006)  mostly from developed countries  mostly on effect of city size (urbanization economies)  mostly on urban workers  Testing whether cities make workers more productive or productive workers move to cities
  15. 15. Research Questions  Do Marshallian externalities exist in Chinese cities?  And if so, how large is the magnitude?  Do rural migrants benefit from urban labor market agglomeration?
  16. 16. Research Motivation  Massive rural-urban migration of low-skilled workers.  Regulations on urban growth: institutional barriers preventing free migration (hukou system); cities are relatively small (Au and Henderson, 2005)  Global competition; manufacturing industry upgrading  City growth and human capital (Glaeser and Saiz, 2004)  How to make Chinese cities become skilled?
  17. 17. Why Focus on Labor Market Marshallian Externalities?  Mitigate the problem “productive workers select into cities”  Agglomeration economies are very localized—decaying with distance  Very limited empirical evidence so far
  18. 18. Main Findings  There exist Marshallian externalities in the urban labor market in China  Rural migrants also benefit from Marshallian externalities, but benefit much less than do local workers, urban workers, or local workers with an urban hukou  “Double discrimination” (based on hukou and migration status)
  19. 19. Data  2004 Manufacturing Census data: total employment in each firm, by education  2005 inter-census population survey (one- fourth of the 1% sample)  Merge by city-industry link (two-digit industries) (Moretti, 2004)
  20. 20. Key Variables of Agglomeration  log(Emp): total employment in a city- industry, measuring labor market pooling effect  CollegeShare: number of workers with a college degree or above in a city-industry cell divided by total employment in that city-industry cell (human capital externality)
  21. 21. Model effectfixedindustry: effectfixedcity: cityinindustryinsharecollege: cityinindustryinemploymenttotal: ..)education.age,(gender,attributesindividual: cityinindustryinworkerofwage: )log(log 3 21 j k jk jk i ijk ijkjk jkijkijk kjreCollegeSha kjEmp X kjiW reCollegeSha EmpXW      
  22. 22. Causal Identification  Two observationally identical workers (A and B) working in the same industry in two identical cities (CA and CB), the only difference is that in one city (CA) there are more workers and more highly-educated workers in that industry, does this increase worker A’s wage?  How to make two workers observationally identical? Include many observed worker characteristics: gender, age, marital status, education, hukou status, migration year, type of employers, type of labor contract, industry, occupation
  23. 23. Existence of labor market agglomeration economies baseline industry occupation occuindu Urbanhukou 0.0297*** 0.0375*** 0.0166*** 0.0217*** 2.51 3.49 2.20 2.93 Highschool 0.1330*** 0.1322*** 0.1008*** 0.1004*** 23.57 22.47 26.64 26.91 Associate 0.4284*** 0.4250*** 0.3226*** 0.3200*** 31.01 31.02 33.12 33.56 College 0.7560*** 0.7522*** 0.6032*** 0.6005*** 26.67 26.81 28.84 29.53 Masterabove 1.3198*** 1.3097*** 1.1195*** 1.1132*** 29.55 29.48 31.21 31.45 log(Emp) 0.0052* 0.0015 0.0019 0.0029 1.72 0.36 0.66 0.74 CollegeShare 0.5044*** 0.3431*** 0.4621*** 0.3598*** 9.97 5.36 10.03 6.10 R2 0.39 0.40 0.43 0.44 sample size 172,002
  24. 24.  Weak evidence from labor market pooling  Subsamples: sorting bias not serious  Significant human capital externalities (0.2-0.4 in USA) Robustness check occuindu local migrants <=2.5year >2.5year <=33 >33 Log(Emp) 0.0029 0.0111** 0.0015 -0.0018 0.0147*** 0.0018 0.0071 0.74 1.91 0.47 -0.51 3.40 0.50 1.49 College Share 0.3598*** 0.3473*** 0.2812*** 0.2285*** 0.3454*** 0.3228*** 0.3847*** 6.10 5.06 3.87 3.05 3.22 5.26 5.63 R2 0.44 0.44 0.43 0.39 0.46 0.44 0.45 obs. 172002 97478 74524 34975 39549 91426 80576
  25. 25. Rural migrants benefit from Marshallian externalities baseline Migrant year<=2.5 Migrant year>2.5 Age<=26 Age>26 Log(Emp) 0.0123*** 0.0128** 0.0115*** 0.0181*** 0.0104*** 2.70 2.20 2.26 3.02 2.19 CollegeShare 0.2095** 0.3551*** 0.1119 0.2209* 0.2381** 1.93 2.64 0.93 1.67 2.07 R2 0.30 0.25 0.33 0.26 0.35 obs. 49916 23302 26614 25260 24656
  26. 26. Rural migrants benefit less from agglomeration economies 1 2 3 4 5 6 7 full sample Rural migrants Urban hukou Local hukou Local urban Urban migrants All Log(Emp) 0.003 0.012*** 0.018*** 0.011** 0.020*** 0.018** 0.012** log(Emp) * Migrant*Urban 0.009** log(Emp) * Local *Rural -0.014*** log(Emp) *Rural *Migrant -0.024*** CollegeShare 0.360*** 0.210** 0.348*** 0.347*** 0.329*** 0.513*** 0.554*** CollegeShare* Migrant*Urban 0.037 CollegeShare* Local*Rural -0.615*** CollegeShare *Rural* Migrant -0.588***
  27. 27. Possible Interpretation  Work in informal job sectors that have fewer spillovers?  Low-skilled, low absorptive capacity? (education categories)  Rural migrants lack of social network? (information asymmetry)  Discrimination?
  28. 28. High-skilled workers benefit less if they are rural 1 2 3 4 5 6 Low skilled High skilled Low skilled U/R High skilled U/R Low skilled L/M High skilled L/M Log(Emp) 0.003 0.014** 0.010* 0.017*** 0.005 0.017** Log(Emp)*Rural -0.013*** -0.038** Log(Emp)*Migrant -0.009** -0.010 CollegeShare 0.311*** 0.504*** 0.537*** 0.517*** 0.322*** 0.499*** CollegeShare* Rural -0.556*** -0.577*** CollegeShare* Migrant -0.074 0.035
  29. 29. Low / high-skilled worker sample Full sample Low-skilled High-skilled Log(Emp) 0.012* 0.008 0.018*** Log(Emp)*urban*migrant 0.009** 0.002 -0.004 Log(Emp)*local*rural -0.014*** -0.007* -0.019 Log(Emp)*rural*migrant -0.024*** -0.014** -0.046*** CollegeShare 0.554*** 0.538*** 0.509*** CollegeShare*urban* migrant 0.037 -0.093 0.053 CollegeShare*local*rural -0.615*** -0.580*** -0.584** CollegeShare*rural* migrant -0.588*** -0.500*** -0.503 (-1.49)  There may exist two types of discrimination: local bias and urban bias
  30. 30. Other Studies Suggest Double Discrimination  Zax (2016): returns to education vary significantly and persistently across provinces and years, suggesting mobility barriers across provinces  Chen et al. (2015): rural migrants are more likely to search jobs through informal social network but receive lower wages if they do so.
  31. 31. Other Studies Suggest Double Discrimination  Liu et al. (2016): rural migrants are residentially segregated in Shanghai, based on Census 2010
  32. 32. (.9,1] (.8,.9] (.65,.8] (.5,.65] (.4,.5] [0,.4] Local Ratio in Shanghai(2010) (0.750,1.000] (0.550,0.750] (0.350,0.550] (0.250,0.350] (0.200,0.250] [0.000,0.200] Migrant Ratio in Shanghai(2010)
  33. 33. Conclusion  Labor market agglomeration economies exist in Chinese cities  Rural migrants benefit from labor market agglomeration economies, but benefit much less than do local, urban residents  Double discrimination towards rural migrants
  34. 34. Implications  What drives rural-urban migration and urbanization? Cities facilitate learning  Learning in cities through social interactions, alternative to school education  Barriers to learning
  35. 35. How Can Chinese Cities Attract Skilled People?  Make cities safe  Make cities clean: air quality  Make cities accessible: public transit, walkable streets  Make cities livable: affordable housing, open space…  Make cities open, tolerant: remove mobility barriers Fortunately, China is reforming the hukou system.
  36. 36. Future Research  Identify how people socially interact in cities  Test how relaxing or removing mobility barriers enhances social interactions  Urban public policies that promote social interactions and learning in cities
  37. 37. Thanks for your attention! Comments are very welcome. shihefu@mit.edu

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