TRADE LIBERALIZATION AND THE GREAT LABOR REALLOCATION

Yuan Zi

International Economic Review, 2025, vol. 66, issue 2, 933-963

Abstract: I examine how migration frictions shape the effects of trade policy by analyzing the impact of tariff reductions on labor allocation in China and the role of hukou‐based migration frictions. Trade liberalization induces significant labor reallocation, greater in regions with lower hukou frictions. Quantitatively, trade liberalization increases China's welfare by 0.72%. Abolishing the hukou system directly improves welfare by 1.75% but reduces gains from tariff reductions by 18% and amplifies negative distributional effects. In the process, I develop a novel measure of hukou‐related migration frictions.

Date: 2025
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