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| Identification of the Extent and Determinants of Interregional Segmentation in China's Factor Markets |
| MA Caoyuan, SUN Siyang, ZHANG Zhao
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| School of Economics and Finance, Xi'an Jiaotong University |
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Abstract Since the 1980s, China's decentralization reform of its administrative system has effectively promoted the rapid growth of the economy by strengthening interregional competition. However, it has also triggered competition among local governments for production factors, leading to the regional segmentation of factor markets. In the labor market, although the gradual reform of the hukou system has reduced the blocking effect of hukou control on labor mobility, the discriminatory subsidy competition for human capital continues to affect the efficiency of the spatial allocation of labor. In the capital market, local governments can not only influence banking institutions and intervene in regional credit funds but also affect the relative price of capital through industrial policies. In recent years, the central government has launched a series of policies to deepen the market-oriented reform of production factors and build a unified national market. The central government clearly states that local protection and market segmentation should be eliminated and the free and orderly mobility of production factors should be promoted.
The literature mostly measures the interregional segmentation effect in factor markets based on the dispersion of labor and capital prices among different regions. The drawback of this approach is that the differences in factor prices between regions not only reflect institutional segmentation between different administrative jurisdictions but also contain various frictions that are difficult to observe. Economic and social differences between regions could also have an impact on factor compensation and productivity. Because non-institutional elements are not ruled out, it is difficult to directly test the existence of regional segmentation of factor markets; however, indirectly judging the segmentation status using the time trend of factor price dispersion among regions affects the reliability of any conclusions.
We design a novel identification strategy that is based on the spatial adjacency of the prefecture-level cities next to China's provincial borders and uses the Annual Survey of Industrial Firms (ASIF) to estimate the interprovincial segmentation effect in factor markets. Along each provincial border, we use the “cross-province” adjacent city pairs as the treatment group and their “within-province” counterparts as the control group to ensure similarity between the two groups with respect to the frictional barriers to factor movement. The benchmark regressions show that both the labor and capital markets experience an interprovincial leap in the gaps between factor compensation and productivity, indicating that there is a significant inter-provincial segmentation effect in the factor markets.
We then conduct three robustness tests. First, concerning the fact that some provincial boundaries may also be geographical and cultural dividing lines, we exclude adjacent cities that have mountains, rivers, or dialect diversity between them. Second, we use the balance test to exclude the city pairs that are not comparable in terms of various economic and social covariates. Third, to alleviate measurement error, we adjust our calculation of factor compensation and productivity using information about human capital and non-wage compensation provided by the ASIF over several years. All of our results show that our major conclusions hold. In addition, we use the same identification strategy to investigate factor market segmentation among prefecture-level cities within the same province. There are also segmentations of the labor and capital markets among prefecture-level cities, but the degree of segmentation is approximately half that of interprovincial segmentation.
Using the estimates of interprovincial segmentation effects in the factor markets, we then conduct a regression analysis of the institutional causes of segmentation. The results show that tax competition among local governments under fiscal decentralization and the overlap of interownership barriers and administrative boundaries are two major causes of interprovincial segmentation in factor markets. Furthermore, although the staggered opening process of the hukou system alleviates segmentation in the labor market, at least to some extent, the evidence on this point is limited.
The policy implication of this paper is that to achieve a market-oriented allocation of production factors, the elimination of factor market segmentation among administrative regions must be an important policy target. For this reason, it is necessary to build an incentive mechanism to support the construction of a unified national market, increase the supervision and punishment of factor market segmentation, and stimulate healthy competition between regions. At the same time, efforts should be made to eliminate institutional barriers that hinder market-oriented allocation and promote the mobility of factors in an integrated market.
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Received: 10 August 2022
Published: 07 April 2023
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