When Globalization Meets Urbanization: Labor Market Reform, Income Inequality, and Economic Growth in the People’s Republic of China

Abstract

The development path that the People’s Republic of China (PRC) has been following during the past thirty years has led to both internal and external economic imbalances, and is now greatly challenged by the global crisis. This unbalanced growth path was primarily a result of the PRC’s labor market reform which took the years of the mid-1990s as its turning point. Before the mid-1990s, the scale of rural-to-urban migration was limited, but it has grown dramatically since then. 1996 also saw drastic employment restructuring in urban areas of the PRC. Labor market reform, accompanied by the foreign exchange system reform in 1994, confirmed the PRC’s comparative advantage of low labor cost, and therefore further increased the PRC’s reliance on exports. However, the increased income disparity that resulted from the labor market reform may jeopardize sustainable growth if no adjustment is made. To sustain the high economic growth, especially in face of the current crisis, the PRC needs to adjust its reform and development strategies to promote income equality.