Hitting The Great Wall: Rural-Urban Migration and China's Growth Slowdown

China is facing slowing growth rates, slowing rates of rural to urban migration and resistance to reforms that would liberalize internal migration restrictions (Hukou). We develop a two-sector Ramsey model and use counterfactual simulations to quantify the impact of internal migration and labor market reforms. We find that the impact of sectoral labor reallocation on growth is amplified by capital accumulation and is more than twice as large as conventional growth accounting measures. While these effects have diminished as agricultural labor declines, we also find that, once we allow for capital dynamics, Hukou reform could add 1.1-1.5 percentage points to China’s growth over the next decade.