Labor Market Integration and Entrepreneurship

This paper investigates the impact of various labor market integration policies on the migration decisions of entrepreneurs and the performance of their firms, in the context of China’s Hukou policies. We first present suggestive evidence that various Hukou policies have significant and heterogeneous effects on the migration decisions of both workers and entrepreneurs. We then present a spatial general equilibrium framework that takes into account the key features of the Chinese migration restriction system to explain how workers’ and firms’ location choices interact in response to heterogeneous labor mobility restrictions by skill type. We compile a unique dataset of prefectural-level Hukou reforms between 1995 and 2019, and combine together with data on labor migration flows, entrepreneurs’ migration flows, and the registration records of close to 90 million firms, to identify the effect of reductions of labor mobility restriction on the regional redistribution of entrepreneurship. The removal of Hukou restrictions facilitates the sorting of entrepreneurs, with those in high-skill intensity industries moving from smaller cities to larger cities. Additionally, we demonstrate that skill-biased relaxation of mobility restriction attracts high-skill labor and migrant entrepreneurs, at the expense of local entrepreneurs. In contrast, nonrestrictive Hukou relaxation stimulates overall economic activities through abundant labor supply, firm agglomeration, and, more importantly, the simultaneous movement of labor and entrepreneurs.