Road to Free labour Market: The Impact of Abolition of Job Assignment Reform in China

Abstract

This paper examines how labour market outcomes are affected by college graduates’ employment liberalization in China, which refers to the abolition of the job assignment system. Exploiting the cohort-specific exposure to the reform, the estimation from census and household survey data suggest that the reform decreases the employment rate for about 3.6 percentage points and increases wages of employed workers by about 21.4 percent. Building on the evidence, I develop and calibrates an equilibrium search and matching model with two sectors and human capital heterogeneity. Welfare analysis indicates that employment liberation is beneficial to workers with higher human capital by allocating them to more productive vacancies, which leads to an increase in equilibrium wages and total output. The results shed light on the role of labour market liberalization on the economic transition of China.