Cost-benefit analysis of the Hukou reform: Simulation evidence from a theoretical labor market model

We built a labor market model in China to incorporate key features of the current Chinese Hukou system (a system of household registration). Simulation analyses showed that when the Hukou system was fully reformed or abolished, more older workers would migrate to cities, leading to a rise in national GDP and a large reduction in nation-wide income inequality. Moreover, we found that the cost of the policy could be offset by the increase in national GDP. That is to say, the budget concern should not be the obstacle for the Hukou reform. In order to reduce inequality, the government should promote more fundamental Hukou reforms.