Author: Cai Fang, Member of the Faculty of the Chinese Academy of Social Sciences, Former Vice President (Source: Economic Research Journal, Issue 10, 2023)
Cai Fang: The effect, direction and path of the reform of the hukou system
The reform of the hukou system is an important breakthrough in breaking the dual structure of urban and rural areas, and it is also a key move to obtain new momentum for high-quality development from the supply side and the demand side, as well as to maintain and enhance social mobility. Promoting reforms in this area in accordance with the requirements of Chinese-style modernization can create real money and immediate reform dividends, and correspondingly, the delay of reform also has significant opportunity costs and real losses. This paper focuses on revealing the huge benefits that can be created by the reform of the hukou system from both the supply and demand sides, and warns that the delay of the reform may lead to an "inverse Lewis process" that is not conducive to the transfer of surplus labor, and a "reverse Kuznets process" that is not conducive to productivity improvement. After making the judgment that social mobility tends to weaken in China, this paper explains how the reform of the hukou system can effectively promote social mobility, thereby increasing the population's fertility intention. This paper also discusses the incompatibility of reform incentives in the process of promoting this reform, and puts forward policy recommendations for dismantling this incentive barrier.
I. INTRODUCTION
In his speech at the Central Rural Work Conference on December 28, 2020, General Secretary Xi Jinping stressed: "The next 15 years will be a window period to break the dual structure of urban and rural areas and improve the institutional mechanism for urban-rural integrated development. 1 The report of the 20th National Congress of the Communist Party of China also pointed out that it is necessary to promote a new type of urbanization with people as the core and accelerate the urbanization of the agricultural transfer population. 2. The implementation of these major deployments and the realization of the expected goals and requirements are conditional on accelerating the reform of the household registration system. The reform of the hukou system has a high degree of consensus in academic and policy research, has long been deployed in important documents of the CPC Central Committee and the State Council, and has made great progress in practice. However, there is still a difference of 18 percentage points between the urbanization rate of the registered population and the urbanization rate of the permanent population, which means that migrant workers and their family members who have migrated to the cities have not yet become urban registered residents, which means that the reform has not yet been completed.
It is true that the reasons for the long-standing reform of the hukou system should be answered theoretically and policywise, and it should naturally become a high-priority research topic. At the same time, there are certain limitations in understanding this reform, which constitute an obstacle to the implementation of the reform. In other words, to substantively promote the reform of the household registration system, it is necessary to break through the relevant misunderstandings and enhance the understanding of the importance, necessity and urgency of this reform. First, the reform of the hukou system not only involves the issue of equal development opportunities for urban and rural residents, equal access to basic public services, or enhanced social mobility, but also significantly increases the potential economic growth rate by increasing labor supply and improving the efficiency of resource reallocation. Second, the reform brings real money benefits or reform dividends, which are not only manifested in long-term economic impact and institutional effects, but also have immediate effects on solving a series of problems that exist in reality, from post-epidemic economic recovery to youth unemployment control. Thirdly, the reform of the hukou system not only forms a supply-side effect to maintain a reasonable growth rate, but also has an increasingly important significance on the demand side, that is, it helps to expand consumer demand and break the normal constraints of economic growth from demand. Finally, the logic of the previous reform, which relied mainly on the promotion of market entities or local governments, is no longer effective for this reform. In order to implement this reform, it is necessary to overcome the incentive incompatibility between the central and local governments.
Combined with theoretical logic and empirical results, further clarifying the misunderstandings or limitations revealed above will undoubtedly help to solve the puzzle of why the reform of the hukou system has been so unsatisfactory when the benefits of the reform of the hukou system are so significant and immediate. This will also enhance our understanding of the need to substantively advance the reform of the hukou system. Not only that, although the reform of the hukou system can bring reform dividends, which will have the effect of icing on the cake, the delay in the reform process will have a bottom-up effect on economic and social development. The clarification and correct interpretation of some of the understandings can help to reveal the urgency of this reform. In the face of the dual challenges of the new normal of economic development and the new normal of population development, the reform of the household registration system is a reform agenda with the right direction, remarkable results and no time to wait.
This paper aims to clarify some one-sided understandings about the reform of the hukou system, fill in the blind spots related to it, and put forward policy recommendations from the perspective of further promoting the reform. The remainder of this paper focuses on four intentions: the second part deals with the dividends of reform, revealing the enormous benefits that can be created by the reform of the hukou system on both the supply and demand sides. The third part warns that delays in the reform of the hukou system may lead to the "reverse Lewis process" and the "reverse Kuznets process", which will hinder the better development of China's economy. Part IV further explains how the reform of the hukou system can effectively promote social mobility, thereby increasing the fertility willingness of the population on the basis of improving the level of provision and equalization of basic public services. The fifth part puts forward policy recommendations from the perspective of achieving the compatibility of reform incentives, combined with the conclusions drawn from the analysis.
2. Maintain a reasonable economic growth rate by breaking down the dual structure of urban and rural areas
The Chinese population peaked in 2021 and began to decline in 2022, while the proportion of the population aged 65 and over exceeded 14,3 marking an important demographic turning point. Combined with many new changes in population development trends, the first meeting of the 20th Central Financial and Economic Commission made an important judgment on the new normal of population development, calling for high-quality population development to support Chinese-style modernization. 4. The new normal of population development will inevitably give new meaning to the new normal of economic development. From the supply side, the new normal of economic development that has been entered will continue, and some related trends will accelerate. From the demand side, household consumption has increasingly become a normal constraint on economic growth, posing an obstacle to the realization of potential growth capacity.
As one of the characteristics of the new normal of economic development, the downward trend of economic growth since 2012 is intrinsically related to the negative growth of the working-age population during this period, that is, the resulting labor shortage, the slowdown in the improvement of human capital and labor productivity, and the decline in return on investment have led to a decline in the potential growth rate (Cai & Lu, 2013). From then until the Chinese population peaked, the actual growth rate was in full line with the potential growth rate, meaning that there were no substantial demand-side constraints during this period. After the onset of negative population growth, the rate of decline in the working-age population will accelerate further, implying that the potential growth rate will decline faster than previously expected (Cai et al., 2022), and demand-side constraints will begin to emerge.
Many studies that have shown a cautious attitude towards China's economic growth potential have mostly used negative labor force growth as the main basis for making judgments. Since the working-age population is declining year by year, the negative growth of the labor force will inevitably weaken China's economic growth capacity. As a result, some consulting research institutions have raised doubts about China's ability to overtake the United States as the world's largest economy around 2030 (Capital Economics, 2018). However, such studies ignore an important factor, which is that China can significantly increase the supply of labor in non-agricultural industries through the transfer of agricultural labor. According to the World Bank, the share of agricultural employment in high-income countries was only 5% in 2021. In the same year, China's share was as high as 23 percent, indicating that there is huge potential for agricultural labor transfer. Especially given the super-large base of China's labor force, the increase in non-farm labor caused by a 10 percentage point shift from agricultural labor is enough to exceed the total labor force of countries of Pakistan and Russia.
This means that the transfer of agricultural surplus labor promoted by the reform of the hukou system can, to a considerable extent, help China's economy cope with the supply-side challenge of negative population growth, and directly kill two birds with one stone. While demographic factors have an adverse impact on potential growth capacity in the form of labor shortages, slower improvements in human capital and labor productivity, and declining returns on investment, labor supply and reallocation are the most critical constraints. The reform of the hukou system has a direct purpose in this regard, and can create real money and silver reform dividends. The first effect is to increase the supply of labor, curb the rapid increase in enterprise costs, and stabilize the comparative advantage of the manufacturing industry and its share of GDP. The second effect is to promote the transfer of labor force from agriculture and rural areas to urban non-agricultural industries in accordance with the direction of labor productivity improvement, and improve labor productivity through resource reallocation. A previous study showed that these two effects of labor mobility can be translated into higher potential GDP growth rates almost uncompromisingly (Lu Yang and Cai Fang, 2016).
The more significant changes in the new normal of economic development are manifested on the demand side. With the negative growth of the working-age population since 2011, China's economy is no longer characterized by an unlimited supply of labor, and labor shortages and rising costs have driven the rapid loss of the comparative advantage of the manufacturing industry, and the proportion of manufacturing in GDP has also accelerated. This correspondingly puts forward the urgent requirements of expanding domestic demand and accelerating the formation of a dual cycle with the domestic cycle as the main body. Before the new crown pneumonia epidemic, this kind of development mode transformation with the connotation of balancing domestic and external demand has made some progress. For example, comparing the arithmetic mean between 2010 and 2014 and 2015 and 2019, World Bank data show that the household consumption rate (household consumption expenditure as a share of GDP) increased from 35.4% to 39.6%; According to the National Bureau of Statistics, the contribution rate of household consumption to GDP growth increased from 38.3% to 44.0%.
As the total population enters an era of negative growth, the expansion of domestic demand will encounter new obstacles. The basis of domestic demand is final consumption, and the basis of final consumption is household consumption. The growth of household consumption depends on two factors: population growth and the increase in per capita consumption level, of which per capita consumption depends on two factors: consumption capacity and willingness to spend. In addition to being the direct factors that inhibit consumer demand, negative population growth and deeper aging are also due to factors such as weakening employment expansion, slowing income growth, and increasing precautionary pension savings, resulting in a decline in consumption capacity and willingness to spend. Needless to say, the trend of negative population growth is difficult to reverse, however, expanding employment to maintain the growth of residents' income, and improving the level and equalization of basic public services have the effect of increasing the level of consumption and the willingness to consume. Of course, this potential should be tapped from many aspects, however, a series of institutional reforms, policy adjustments and system construction aimed at breaking the dual structure of urban and rural areas can produce the most direct and significant reform dividends and greatly increase residents' consumption.
Migrant workers who have gone out to work are a demographic group that cannot be ignored, and they also contain huge untapped consumption potential. In 2022, the average monthly wage of migrant workers will reach 5,240 yuan, which is converted into an annual income of 63,000 yuan, and the income of the whole family is close to 126,000 yuan, and the average income per capita can reach 42,000 yuan, which is very close to the average level of 44,000 yuan in the urban middle income group. A rough assumption can be made that if there is no interference from other factors, migrant worker households that are statistically classified as urban permanent residents should have the same level of consumption expenditure as the average number of urban residents, that is, 30,391 yuan at the current price in 2022. However, because this group does not have an urban hukou and does not have equal access to basic public services, their consumption is effectively suppressed.
Chinese scholars and scholars from the Organisation for Economic Co-operation and Development (OECD) have used different data to estimate the extent to which migrant workers' consumption has been suppressed, and have come to the same conclusion: the lack of urban household registration alone has reduced the willingness of migrant households to consume by about 23 percent. In other words, once this institutional obstacle is gone, the worries of migrant workers' consumption can be eliminated, and even if other conditions remain the same, the consumption expenditure of migrant households can increase significantly, by nearly 30% (Wang Meiyan, 2016; Molnar, 2017)。 The reform of the household registration system, which aims to promote the settlement of migrant workers in the cities where they work, can undoubtedly achieve this.
In 2022, the total number of migrant workers who went out was 172 million, and most of them met the statistical definition of urban permanent population. If the above scholars' estimates are adopted, that is, their average consumption expenditure is 23% lower than the average urban residents, it can be calculated that their average consumption expenditure is only 23,705 yuan. In other words, if the reform of the household registration system makes all this population group become urban residents, the change in their willingness to consume alone can increase their average consumption level by 6,686 yuan to the average level of 30,391 yuan of urban residents. From the macro level, the resulting increase in household consumption can reach 1.2 trillion yuan. It is worth noting that the scenario simulated here should not be seen as a prediction, nor should it be expected to be quantitatively accurate, but only to make relevant policy recommendations and emphasize the significance of its effects. This potential policy reform also has the effect of boosting the post-pandemic economic recovery, matching the proposed problems of excess savings and weak consumption by orders of magnitude.
From the perspective of international comparison, the consumption rate of Chinese residents is significantly lower than the average of the World Bank's income grouping countries, and there is also a significant gap with the world average. This undoubtedly constitutes an unusual feature of Chinese residents' consumption. In recent years, China's per capita GDP has roughly been equivalent to the world average, but the household consumption rate is only 69.1% of the world average. Therefore, although the world share of the Chinese population is 17.8%, the world's share of household consumption expenditure is only 12.8%. This means that the convergence of the world average requires China's household consumption rate to narrow the gap of 5 percentage points. The aim is to convert 172 million migrant workers into registered residents, which can fill 53.9% of this gap, which shows that the reform dividend is significant.
3. Avoiding the "Inverse Lewis Process" and the "Inverse Kuznets Process"
The above discussion of how the hukou system can create an effect of increasing the economic growth rate from both the supply and demand sides aims to reveal the necessity and significance of this reform. An equally important research topic is to reveal the practical urgency of this reform. Since the dividends of reform are very significant, there must be a huge opportunity cost to delay reform. At the same time, delays in reform could lead to real losses in productivity and even growth. Since this is a topic that combines theory and experience, this paper starts with theory, that is, by discussing the two concepts of Lewis process and Kuznets process, and then discusses how the Lewis process has the potential to be transformed into an inverse Lewis process. As for the Kuznets process and the inverse Kuznets process, they are nothing more than logical and historical consequences.
The so-called Lewis process refers to the dualistic economic development described by Arthur Lewis's dualistic economic theory (Lewis, 1954), which means that the transfer of surplus agricultural labor can provide a steady stream of low-cost labor for industrialization, and economic growth will be promoted. This process continues until the Lewis turning point is the point when the surplus labor is exhausted and wages must be raised in order to continue to receive a supply of labor (Cai, 2016). The Kuznets process refers to Simon Kuznets' description of the same process from another side, with particular emphasis on the nature of labor transfer in the direction of labor productivity increase, leading to the upgrading of the industrial structure (Simon Kuznets, 1985; Aoki, 2012)。 It can be seen that both the Lewis process and the Kuznets process can be regarded as characteristic facts of the process of economic development at a specific stage. During the period of reform and opening up, China's economic growth has gone through these two processes, which also show the development characteristics of these two processes: through the reallocation of labor, the overall labor productivity has been improved, and high-speed economic growth and industrial structure optimization and upgrading have been achieved (Cai Fang, 2017).
The following attempts to illustrate how the lewis process is transformed into the inverse lewis process with Figure 1. According to the dualistic economic theory, until the Lewis turning point (T in the figure) is reached, the infinite supply of labor will keep wages at W0, regardless of how the labor demand curve moves to the upper right. Once the economic development crosses the Lewis turning point, the labor supply curve S0 ceases to be infinitely elastic, or begins to rise. Correspondingly, as the demand for labor expands, wages inevitably increase (e.g., to W1). If the Lewis turning point is reached earlier before the surplus labor is exhausted, or if a significant increase in labor supply occurs, such as large-scale international migration, the labor supply curve expands to the S1 level. It is obviously not feasible to absorb this deviation from the equilibrium level of labor in the form of "price adjustment", that is, the overall wage level to stabilize, or even fall, for example, to W2. In reality, it is either manifested in "quantitative adjustment", i.e., rising unemployment, or in the "reverse Kuznets process", in which case there is a deterioration in resource allocation, such as the inflow of new labor into low-productivity jobs (Cai Fang, 2021). At the same time, the duality of the labour market has reinforced, and although in many cases surplus labor in the non-farm sector may not necessarily return to agricultural production, this pressure often leads to the informalization of non-farm employment, so it can also be described as a "reverse Lewis process".
Fig. 1 Dualistic economic development and inverse Lewis process
Observing the trends of employment growth rates in the three industries in different periods, we can judge the current status of these two reverse processes (Table 1). If the reverse flow of labor to agriculture is taken as a strict characterization of the reverse Lewis process, it should be said that this process does not occur in general. However, in a looser definition, this reverse process is already emerging. For example, the rate of agricultural labour transfer has slowed while the share of agricultural employment is still 20 percentage points higher than the average for high-income countries. At the same time, under the influence of the decline in the total labor force, the decline in the proportion of manufacturing and the impact of the new crown pneumonia epidemic, the labor force in the secondary industry has begun to decrease, and the tertiary industry has shown large fluctuations in labor growth as an employment reservoir. If the flow of labor from the secondary industry with higher labor productivity to the tertiary industry with lower labor productivity is taken as a strict characterization of the reverse Kuznets process, this process has actually taken place and has become an important reason for the significant slowdown in the growth rate of labor productivity and total factor productivity in recent years (Cai Fang, 2021; Bai and Zhang, 2014).
Table 1 Average annual increase and decrease of labor force in the three industries (%)
Source: National Bureau of Statistics, "National Data" (data.stats.gov.cn/easyquery.htm?cn=C01).
With the demographic dividend declining, China's economy urgently needs to shift to a productivity-driven growth model. However, it is precisely during this period that the slowdown in the rate of productivity improvement is also a phenomenon that conforms to the law of phases. Revealing the following logical relationships can help us understand the principle of this phenomenon and find the direction to change the path. The existence of the household registration system makes the transfer of agricultural surplus labor insufficient and the urbanization is not complete, which means that the manufacturing industry is facing a labor shortage, which is a precocious phenomenon. The resulting substitution of labor by capital, the decline in manufacturing exports, and the decline in the share of manufacturing mean that the manufacturing sector, which is more productive, not only no longer has the ability to absorb the transferred labor force, but even has a tendency to exclude employment. As a result, the labor transferred from agriculture and the labor excluded from the manufacturing industry had to return to industries and regions with lower productivity. The direct result of this whole process, expressed in the form of the inverse Lewis process and the inverse Kuznets process, is the weakening of the sustainability of economic growth.
Observing the phenomenon of migrant workers returning to their hometowns in a broad sense in recent years, that is, returning to their villages to engage in agricultural production, engaging in non-agricultural industries in the villages and towns where their household registration is located, working and doing business within their own counties or cities, and even changing from inter-provincial migration to intra-provincial migration, etc., are all regarded as "returning to their hometowns" in a broad sense, it is natural to draw a conclusion that the reverse Lewis process in the broad sense has taken place. The National Bureau of Statistics (NBS) defines migrant workers as migrant workers who work outside the township or township where their household registration is located. Therefore, the slowdown in the growth rate or the decrease in the number of this group can generally statistically reflect the trend of returning to their hometowns, which is manifested in three changes. The first visible change is that the growth rate of migrant workers has slowed significantly, from an average annual growth rate of 4.5% in the 2002-2012 period to an average annual growth rate of 0.5% in the 2012-2022 period. The second change is that the employment of migrant workers tends to be localized. Studies have shown that an increasing number of migrant workers who leave their townships for employment are actually moving within their own province and city, or even working in neighboring townships or counties (Zhuo Xian and Yang Xiuna, 2021). The third change is that migrant workers in urban areas have shifted from manufacturing to services. The proportion of migrant workers in tertiary industry employment has increased significantly from 33.1% in 2008 to 51.7% in 2022.
The emergence of this generalized inverse Lewis process has consequences at both the macro and micro levels. Judging from the general law of declining agricultural employment, this process further strengthens the characteristics of the excessively high proportion of agricultural employment. Due to the huge disparity between the proportion of agricultural output value and the proportion of employment, the comparative labor productivity of agriculture derived from the ratio between the former and the latter is still very low, which also means that there is still a surplus labor force accumulated in agriculture, which makes agricultural production and operators suffer from diminishing returns. Using the data of the National Bureau of Statistics, it is possible to calculate the comparative labor productivity of the three industries, of which the proportion of the primary industry equivalent to the secondary and tertiary industries was 13.1% and 19.5% in 1980, 6.7% and 17.8% in 2000, and 7.2% and 23.8% in 2021, respectively. As a result of this situation, the comparative income of agriculture has been hovering at a low level for a long time, and the share of disposable income of rural residents from agricultural operations is low. The micro response to this is that the rural labor force is characterized by part-time or cross-industry employment. To solve the mystery of comparative labor productivity in agriculture and the involution trend of rural labor allocation, it is necessary to take the reform of the household registration system as a breakthrough and maintain the positive Lewis process and Kuznets process.
Fourth, improve social mobility through the reform of the household registration system
Economies that have grown at once have experienced significant slowdowns in growth at certain stages of development, typically when crossing the threshold from middle- to high-income. Cross-country studies have shown that this phenomenon is statistically prevalent (e.g., Eichengreen et al., 2011). If the occurrence of this deceleration phenomenon is related to a particular institutional factor, the deceleration itself and this institutional factor often lead to a decrease in social mobility. In fact, the so-called "middle-income trap" that many researchers are keen to discuss, and the case of Latin America, which is often cited, deals with a situation in which both economic growth drivers and social mobility have stagnated.
It is true that China's working-age population has entered negative growth, which is the most basic reason for the arrival of Lewis's turning point and the decline of the demographic dividend. The resulting deceleration of economic growth is also in line with the law of change in the development stage, which can be dealt with through the upgrading of technological structure and industrial structure, as well as the transformation of growth momentum, so as to achieve the transformation from high-speed growth to high-quality development. However, the hindrance effect of the hukou system on the horizontal flow of labor force makes it possible for industry and technology to exclude employment when the source of labor reallocation has not been fully exhausted, so that in a certain sense, the reverse Lewis process and the reverse Kuznets process appear. At the same time, the existence of the hukou system also reduces social mobility and hinders the upward mobility of urban and rural residents in terms of occupational type, income level, social stratification and family development, given that hukou status has become a distinguishing symbol of basic public services such as social security, public employment services, and educational opportunities, as well as support policies such as housing purchase and entrepreneurship financing. Once a pattern of polarization of income and wealth and solidification of social classes is formed, the efficiency of resource allocation is improved and the momentum of economic growth is transformed, it will be substantially hindered by vested interests, and economic and social development will easily fall into a hesitation.
From the household registration status of the urban permanent population, we can see the constraints of the current household registration system on social mobility. According to the data of the Seventh National Population Census, 36.8% of the urban permanent population is still registered in other villages, towns and sub-districts after excluding the phenomenon of household separation within the municipal area (Figure 2). In other words, if local and non-local are defined by townships, towns and sub-districts, this part of the population does not have the household registration status of the place of habitual residence, or simply "household separation". Among them, the separation of households is the most prominent among people who are in the most critical life cycle of career development and family development. For example, the 20-44-year-old age group is the most active employment population, and the proportion of households separated in this group is 59.1%, the proportion of 16-24-year-old population, which is the "youth employment group" of the statistical department, is as high as 60.5%, and the proportion of households separated from households in the 20-34 age group, which is recognized as a population with strong fertility, also reaches 50.9%.
Fig. 2 Proportion of urban non-registered population by age group. Source: Chinese Population Census Yearbook (2020), Tables 3-1a, 3-1b, 7-2a, 7-2b, China Statistics Press, 2022 edition.
The adverse effects of the hukou system on full employment and social mobility can be observed from two aspects: employment status and fertility intention. Before making such observations, this paper attempts to construct an analytical framework to elucidate the mechanism of institutional impact on social mobility, in order to theoretically explain the necessity, urgency, benefits, and costs of delaying the reform of the hukou reform. Furthermore, this paper starts from the difficulties faced by China in the labor market and the fertility dilemma, empirically demonstrates the impact of the hukou system on social mobility, and then reveals the practical pertinence of the reform and the focus and focus of its implementation. This paper assumes that everyone pursues upward social mobility, subject to institutional conditions and market opportunities. Therefore, the focus here is on how the combination of institutional constraints and market opportunities affects social mobility. The four scenarios in Table 2 can be viewed in the counterclockwise direction indicated by the arrows, representing the combination of the strength and weakness of institutional constraints that affect social mobility and the abundance or lack of market opportunities, respectively.
Table 2 Social mobility under different combinations of constraints and opportunities
The first is a combination of extremely strict institutional constraints and extremely rare market opportunities. Obviously, this corresponds to the social mobility in China before the reform and opening up. During this period, economic and social development was uniformly arranged and promoted by the government's plan, and it was difficult for individuals to take the initiative in it. The hukou system serves the initial function of strictly discouraging the movement of people and labour, and of providing public services in a rural-urban manner. At the same time, economic growth is slow, and changes in the industrial structure are also at a standstill. So, social mobility does not exist, either in terms of intention or ability. At the specific level of each resident, there is little opportunity to change social identity, except for the very small possibility of being included in the uniform arrangement of occupation and change of residence. An insignificant circle in the table indicates extremely low social mobility.
The second scenario is a combination of still strict institutional constraints and expanded market opportunities. This undoubtedly corresponds to the situation in the early days of reform and opening up. At this time, the hukou system was no longer able to prevent migration and labor mobility, and the degree of liberalization of economic activities increased significantly. However, hukou status is still used in many cases as a basis for differential treatment in residence, employment and public services. At the same time, the dual economic characteristics of unlimited supply of labor still exist, and the development of non-agricultural industries cannot absorb all the surplus agricultural labor force. In contrast to the first case, social mobility here can be represented by an enlarged circle in the table.
The third scenario is a combination of weakened institutional constraints and increased market opportunities. The corresponding period began with the Lewis turning point in 2004 when there was a labor shortage, and the demographic dividend accelerated after 2011 until today. The hukou system has been liberalized to a relatively large extent, and labour shortages have increased workers' wages and bargaining positions regarding employment conditions. At the same time, economic growth has remained at a more desirable level, changes in the industrial structure have increased the demand for human capital, and the quality of employment has improved. It can be said that social mobility in this period reached the most recent height in history, and thus the table is expressed in larger circles. However, this is already a turning point for a potential weakening of social mobility.
The fourth scenario is a combination of institutional constraints that still exist and market opportunities that are beginning to decline. The corresponding characteristics of economic and social development are that population development shows a new normal of declining birthrate, aging and regional increase and decrease differentiation, the demographic dividend is disappearing at an accelerated pace, and the economic growth rate is further declining. While this is a natural consequence of the demographic transition and the changing stages of economic development, there is a possibility that social mobility will be pushed closer to the first scenario again if the hukou system continues to perform functions that hinder the lateral mobility of labour and vertical social mobility. So in the diagram it is represented by circles that become smaller again. At this time, intensifying the reform of the household registration system and breaking the dual structure of urban and rural areas can not only obtain new momentum for economic and social development, but also create institutional dividends to improve social mobility.
An important perspective for looking at social mobility is the adequacy and regularization of employment. International comparative studies on social mobility show that wage equality is an important pillar of social mobility, and that it is precisely one of China's relative weaknesses. In 2020, the average wage in the bottom 50% of the median labor market was only 12.9% of the average wage in the top 50% of the median, and the share of low-wage earners reached 21.9% (World Economic Forum, 2020). This situation is mainly due to the informal nature of urban employment in China, and a series of related manifestations have the effect of reducing social mobility. For example, the low rate of signing labor contracts, the low rate of social security coverage, the high rate of employee job hopping, and the low motivation of enterprises and employees to receive training, resulting in low stability of employment and wages. Correspondingly, these phenomena are reflected in the lives of residents, which is manifested in the very tight budgetary constraints of family finances and time (Cai Fang, 2022), and in the final analysis, the institutional constraints of the hukou system on the career development of young people. Reform of the hukou system can increase the level of social mobility by removing these constraints.
Another important aspect of looking at social mobility is the status of the family and the desire of young people to have children. Under different social mobility situations, the status of family development or the position of the family in social stratification affects the short- and medium-term, long-term and even intergenerational decision-making of the family in different ways and degrees, which is prominently reflected in the desire to have children. Economists use the so-called "greatest Gatsby curve" to characterize the intergenerational nature of economic and social status. This curve shows that the larger the Gini coefficient, which reflects income disparity, the greater the influence of parental income status on children's income status. In other words, large income disparities are often accompanied by intergenerational transmission of inequality. The study shows that such a curve with a positive slope and a significant one can be drawn for China, with a correlation coefficient of 0.857 between income inequality and intergenerational transmission (World Economic Forum, 2020). That is, in contrast to China's long-standing large income disparities, intergenerational social mobility is also low.
Previous studies have shown that urban residents have lower fertility intentions than rural residents (Yao et al., 2010). If this logic is simply applied, it seems that the continuation of urbanization will only further reduce the fertility rate. However, if two changes are observed in China's reality, such simple conclusions cannot be drawn. First, while the fertility rate of the rural population is decreasing, the fertility rate of the rural population is significantly converging with that of the urban population. For example, according to data from the last three national censuses, the rural fertility rate has decreased from 66.3 per cent and 32.4 per cent in 2000 to 63.0 per cent and 24.6 per cent in 2010, and further to 38.0 per cent and 10.6 per cent in 2020. 6 Second, the mobility of the rural population has been greatly enhanced, and the rural population of childbearing age also happens to be the main body of labor mobility. Due to constraints such as the hukou system, they are a group with uncertain expectations for the future. Therefore, through the reform of the household registration system, allowing migrant workers and their family members to systematically settle down in cities and towns will inevitably produce a "perseverance for those who have constant property" effect. Here, "constant production" refers to the fact that new citizens who settle in cities and towns, on the one hand, can enjoy more stable, more equal, and cover the whole life cycle of basic public services, on the other hand, their family budget curve (including time and income) will be relatively "loose" compared with the previous one, the living pressure will be relatively reduced, and the "cost of three childcare" will be relatively reduced. This effect can significantly improve people's social mobility and intergenerational transmission expectations, thus forming a "perseverance" to increase fertility intentions and invest in human capital.
5. How to achieve the incentive compatibility of the reform of the household registration system?
Research shows that the reform of the hukou system can create immediate reform dividends like real money. On the supply side, it can increase labor supply and improve resource allocation efficiency, thereby increasing the potential GDP growth rate (Lu Yang and Cai Fang, 2016). On the demand side, the large-scale urbanization of migrant workers can be used to expand the middle-income group, significantly increase the consumption demand of residents and the demand for urban construction investment, and support economic growth and post-epidemic recovery with stronger aggregate social demand (Cai Fang, 2023). However, as a key reform area with consensus, deployment and benefits, the reform of the household registration system may be only "one step away" from completion, but it has not been able to take the final key step. The reason for this is that there is an incompatibility of incentives for promoting reform between local governments and the central government, resulting in a lack of enthusiasm and initiative in the specific implementation of reforms, and even hindered by local interests.
This can be understood in two ways. On the one hand, most of the benefits of the reform of the hukou system are reflected at the macro level at the national level, and the main body that promotes the reform is usually the local government. If the size of the urban registered population expands significantly, local governments will need to spend more on social issues, but at the same time, they will not be able to reap the full dividends of reform. On the other hand, many small and medium-sized cities, which have long claimed to have liberalized their household registration, have actually retained such strict settlement conditions as the purchase of commercial housing in order to maintain the operation of the local government's land finance model. It can be seen that if the incentive orientation of local governments cannot be changed in terms of institutional arrangements, it will be difficult to make a rapid and substantial breakthrough in the reform of the household registration system. In the following, we put forward some policy suggestions mainly to improve the incentive compatibility of reform.
First of all, one of the long-term institutional tasks facing China is to focus on establishing and improving a social welfare system that covers the whole people, all regions and the whole life cycle. Once this is done, according to the division of powers and expenditure responsibilities, the social expenditure of the central government and local governments will become a statutory responsibility in the form of the provision of basic public services, and can no longer be treated differently between urban and rural areas of residence and household registration. In other words, accelerating the construction of a Chinese-style welfare state is also in line with the reform requirements of further rationalizing the division of central and local revenues and improving the local tax system. In this way, the asymmetry between responsibility and capacity of local government social expenditure can be solved. One of the purposes of the reform of the hukou system is to promote the equalization of basic public services. At the same time, a more equal provision of basic public services is also a favorable condition for the reform of the hukou system. It can be seen that the two reforms should be linked, mutually supportive, and go hand in hand.
The overall improvement of the level of social welfare usually requires the central government to further strengthen its responsibility for social expenditure. Therefore, the accomplishment of this task may be limited by the current division of fiscal revenue and expenditure between the central and local governments, that is, the low proportion of central finance (Huo Jun, 2015). International experience shows that in countries with high levels of social welfare and human development, the share of central government revenue and expenditure is usually high, rarely below 70 per cent, and the share of central government expenditure in GDP is also high (Table 3). In contrast, China's central government accounts for a significantly lower share of the country's finances. Not only that, but this low central fiscal revenue also bears a very heavy transfer payment, so that after excluding the transfer payment, the central fiscal expenditure accounts for a smaller proportion of the national fiscal expenditure, and the proportion of the central fiscal expenditure in GDP is even more insignificant.
Table 3 International comparison of the proportion of central government (%, 2021)
Sources: International data from the International Monetary Fund database (data.imf.org/regular.aspx?key=60991462); China's data comes from the National Bureau of Statistics' "National Data" (data.stats.gov.cn/easyquery.htm?cn=C01).
Second, an urgent task of policy adjustment in the medium and near term is to seize the window period of breaking the dual structure of urban and rural areas before 2035 (Xi Jinping, 20221), promote the urbanization of migrant workers, narrow or even eliminate the gap between the urbanization rate of the permanent population and the urbanization rate of the registered population, realize the balanced development of urban and rural integration, and on this basis, substantially narrow the gap between urban and rural areas in per capita income and basic public services. It is necessary to concretely implement these aspects as the goal and requirements of basically realizing modernization, and formulate an incentive mechanism, timetable, and road map that links the whole country with local operations. At the same time, the corresponding indicators that reflect the effectiveness of the promotion will be included in the scope of the assessment of the responsibilities of local governments in promoting Chinese-style modernization. On the basis of enhancing the sense of urgency of local governments to promote the reform of the household registration system, we should encourage institutional innovation in various localities and respect the initiative spirit of local governments, so as to form a situation in which decisions are made under a unified goal and "eight immortals cross the sea and each shows its magical powers".
Finally, in terms of specific incentives, the growth of the urban hukou population should be linked to regulatory indicators such as land supply, urban transport infrastructure, and public facilities construction, so as to improve the accuracy and visibility of incentives for the reform of the hukou system in various places. In addition, it is also necessary to guide local governments to obtain the early results of the reform, so that the reform of the hukou system can become a self-reinforcing process that can be promoted and benefited at the same time. For example, the supply-side effects of labor supply growth and productivity growth, the demand-side effects of expanding household consumption and urban construction investment, and the short-term effects of promoting economic recovery and repairing household budget curves and local finances should all be used to promote incentive compatibility and support the reform of the hukou system in a way that reasonably shares costs and benefits between the central and local governments.
(Notes and literature omitted)