The Role of Housing Privatization andLabor-Market Reform in China’s Dual

Economy

by Belton M. FleisherDepartment of EconomicsThe Ohio State University

Columbus, OH 43210Yong Yin

Department of EconomicsState University of New York, Bufialo, NY 14260

and Stephen M. Hills1

Department of Management and Human ResourcesFisher College of BusinessThe Ohio State University

Columbus, OH 43210

November 29, 1996

1We thank Patric Hendershott, Dongwei Su, and Bruce Weinberg for theircomments and Xiaojun Wang for excellent research assistance. Please send com-munications to Fleisher. email °eisher.1@osu.edu

Abstract

JEL Bibliographic Code D1, J61, O53

A critical aspect of China’s economic modernization, one that has been infre-quently addressed either in policy papers or scholarly studies, is the linkagebetween labor-market and housing-market reform. Labor- market mobilityrequires that workers and their families be able to flnd housing in areas ofhigh labor demand. This critical linkage will be facilitated by movementaway from employer-provided housing to a system in which each householdis responsible for flnding, securing, and paying for its own lodging. We flndevidence that in China’s dual labor market, nonagricultural wage rates aresu–ciently above market- clearing levels that eliminating employer-providedhousing from workers’ compensation will not require a concomitant increasein monetary wages. We also flnd indirect evidence that higher housing rentsincrease the quantity of available housing, thus facilitating interprovincialmigration to favored areas.

The Role of Housing Privatization and Labor-MarketReform in China’s Dual Economy

1 Introduction

A key difierence between formerly planned and market economies is the de-gree to which individuals are responsible for their own housing. In China,Eastern Europe, and the countries of the former Soviet Union, economic re-form implies labor-market mobility, and with it, the need for workers andtheir families to flnd housing in the labor markets to which they relocate.In response to this need, housing arrangements are gradually changing. InChina, an increasing number of joint venture and private flrms are no longerproviding housing to new employees. This paper examines the economicefiect of changes in Chinese housing patterns under conditions of gradualmarket reform. Questions addressed include the increased monetary wages(if any) needed to compensate workers for the loss of payment in the form ofemployer-provided housing and the limitations on worker mobility imposedby below-market pricing of the current housing stock.

It is generally agreed that the transition to a market economy will requireshrinkage of employment in the state sector and transfer of labor through for-mal and informal labor markets to the more rapidly growing collective, joint-venture, and private sectors of the economy. The way housing is allocatedin China complicates the transition to a market economy. Industrial restruc-turing through massive shedding of surplus labor in nationalized flrms wouldbe di–cult in any country. It is particularly di–cult in China because of therole that state-owned enterprises have traditionally played in the provisionof income security, housing, medical attention, and other basic needs.

For enterprise reform to progress signiflcantly, provision of basic servicessuch as housing must ultimately be detached from the employment relation-ship. Only then can the level and distribution of employment be rationalizedwithout creating socially and politically unacceptable levels of open unem-

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ployment and economic insecurity. In this paper we focus on two importanteconomic aspects of the change in housing markets as China moves to an in-creasingly deregulated labor market{namely the amount that employers willhave to pay to compensate employees for the loss of their housing benefltsand the amount employees will have to pay in the form of rent or user costto purchase housing services on the open market. We use partial equilib-rium analysis, which we justify by assuming that changes in Chinese housingpatterns will continue to take place step by step and area by area, consis-tent with moderation that has characterized the Chinese economic reformprocess in general. (See Maurer-Fazio, 1995.) An interesting problem inadapting existing approaches to the study of housing and labor markets tothe Chinese situation is that the common assumption of equilibrium in bothmarkets is almost certainly unrealistic. In particular, wages remain above thelevel that would eliminate excess supplies of labor to urban locations and,interregionally, to high-income coastal provinces.1 Moreover, it is doubtfulthat observed housing rents for most Chinese households are determined byequilibrium of demand and supply. An important part of our research ex-plores the implication of these disequilibria for both appropriate estimationprocedures and appropriate policy formation.

The remainder of the paper proceeds as follows. In the next section weoutline a brief description of international experience with housing reform inother transitional economies. Section 3 contains a brief empirical overviewof micro data containing information on household housing expenditure andthe labor-market situation in China across urban and rural areas; in Section4 we develop and estimate a household model of labor supply and housingdemand that uses the same survey data outlined in Section 3. In Section 5we develop an elementary model of provincial labor and housing markets inChina, which we estimate using published provincial data. Section 6 sum-marizes the empirical results and presents policy recommendations.

1It is not only higher wages that promote rural-urban economic disparity. As Yang andZhou (1996) show, urban residents receive higher subsidies of many kinds, including, butnot limited to housing subsidies, than do rural residents.

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2 International Experience with Housing Re-form in the Transition from Planned to Mar-ket Economies

Other countries that are moving from planned to market economies difiersigniflcantly in their policies toward housing. Many have chosen the samegradual approach used in China, but others have chosen much more radicalreform. Scholars, likewise, have difiered in their attitudes toward gradual orradical reform.

Blanchard et al. (1991) argue for rapid privatization whereas McKinnon(1991) favors a more gradual approach. Because company owned housingrestricts intersectoral mobility among the employed, a gradual approach tohousing reform means that the burden of increased e–ciency in the allocationof labor will fall heavily on new job entrants. Competition among employerswill in°ate the salaries of relatively scarce new employees while more expe-rienced workers remain in their jobs, holding on to their housing. For thisreason, many people would argue for a rapid approach to housing reform,but an approach that recognizes the institutional problems in shifting froma planned to a market economy.

Buckley, Hendershott, and Villani (1995) recommend that quick privati-zation of housing be done by giving away housing through a voucher plan.The initial price of an enterprise-owned apartment would flrst be set in termsof the total number of housing vouchers required to purchase the apartment.Vouchers would be distributed to occupants of the housing units, recogniz-ing that wages have been suppressed for many years to help subsidize hous-ing. Thus older, longer tenured occupants would receive more vouchers thanyounger. The difierence between the initial price of the housing and thevouchers that a person possessed would be paid to the enterprise and, pre-sumably, be flnanced through long term loans. The funds that the enterprisereceives from occupants to pay for their housing could then be transferredto housing accounts established for the youngest workers who had not yetreceived housing, thus creating a greater degree of equity between those whowere fortunate enough to have housing and those who were still in the housingqueue.

In Russia and in several countries of Eastern Europe, the US has beenhelping to privatize housing through The Agency for International Devel-opment’s (AID) O–ce of Housing and Urban Programs. (O’Sullivan, 1993)

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Housing has been privatized by giving apartments to their owners. In somecases, owners must pay a larger fee based on the size and condition of theapartment, but age of the resident is not a factor. Over time, this systemwill invariably create inequity between current residents who can eventuallysell their apartments and retain their capital and young people who do notyet own apartments. The plan suggested by Buckley et al. would vary thepurchase price of the apartments with regard to age and would therefore notcreate so sharp a distinction between those who receive apartments now andthose who do not.

Inter-flrm labor mobility would be encouraged by privatization since apart-ments could immediately be bought or sold. With privatized apartments,institutions would also need to be created for the ongoing maintenance ofapartment buildings. Housing cooperatives could be organized, or enter-prises could establish their own management companies that would, in turn,provide maintenance for residents based on service fees.

Two AID projects in Russia and Albania are helpful for demonstratingthe problems that could occur as housing is privatized. In both cases, the UShas provided technical assistance to help make the transition to privatizedhousing in 1993. In the Russian city of Novosibirsk, the municipality ownedand operated about one half of the housing stock (about 175,000 units).When economically troubled enterprises had insu–cient funds to maintaintheir housing, more and more of the housing was transferred to municipalownership. But \the city [faced] the problem of a severe lack of flnancialresources to address its deteriorating housing stock. Virtually all city ownedbuildings [were] in serious need of repair." (O’Sullivan, 1993)

Privatization of housing units began in Novosibirsk in January of 1992.The O–ce of Privatization expected that by the end of 1993 about 20 percentof the housing stock would have been privatized. The city, however, had notyet decided in 1993 how much would be charged to the newly privatized unitsfor building maintenance. It is this problem that AID addressed in a studyfunded in 1993. The authors of the study observed the following:

A competitive private management company industry producesan environment in which the value of property is maintained orenhanced at the least expense to the owner. . . . No such privatemanagement company industry exists in Novosibirsk. . . . Forbuildings in which more than 50 percent of the units have beenprivatized, a property management company industry will ofier

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owners choice in the cost and quality of services they may wishto obtain for their buildings. This may be the only opportunityowners of privatized units will have to exercise choice until thesupply of housing increases to meet demand, a situation not likelyin the foreseeable future. (O’sullivan (1993), pp. 15-16.)

The report recommended encouragement of a management company in-dustry and the enactment of \laws to establish the legal framework withinwhich resident groups can contract with private management companies, suchas condominium laws."(O’Sullivan, 1993, p. 16.)

The US AID has also provided flnancial assistance to Albania as it pri-vatizes its housing. Albania has chosen to privatize much more rapidly thanNovosibirsk. In 1989, the state owned over 200,000 individual housing unitsin urban areas. (Lowry, 1994) At the end of 1992, the government passeda housing privatization bill. About 1/4 of the housing units (older, smallerunits) were to be transferred to private ownership free of charge. Newer,larger units were transferable subject to a schedule of fees that were to bepaid in a lump sum or in negotiated installments. By the end of 1993, 90percent of the occupants of state owned housing units had applied for pri-vatization and by October of 1993, 83 percent of the occupants had signedbinding contracts to obtain their own housing units. (Lowery 1994, p. 17)

The speed with which privatization has occurred is remarkable, but theprivatization will not be a success unless it is supported by equally rapidlegal reforms and changes in the system of building maintenance:

It is now legally possible for a privatized owner to sell or leasehis apartment, and we hear that a few have done so. But theapartment buildings are still theoretically managed by the [Alba-nia state agency,] Banesa, whose policies with respect to mainte-nance and tenant services have not changed and whose flscal re-sources are evaporating. Housing privatization will be a colossalfailure unless management policies change and operating budgetsincrease dramatically.

The legal framework for reforming housing management is inplace but has not been implemented. Few tenants of privatizedapartments understand that they have acquired new responsi-bilities along with their titles of ownership. During the com-ing months, it is imperative that privatized apartment houses

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be legally transformed into condominiums and that the condo-minium owners be educated about their new powers and respon-sibilities.2

These cases show that the transition from regulated housing and labormarkets to freely functioning, competitive markets may involve signiflcant in-creases in wage rates for new entrants to the labor market, the \giving away"of housing units, and the creation of important new housing institutions {maintenance companies or housing cooperatives. In the remainder of thispaper we investigate whether similar adjustments are likely to be required inChina during the transition to unregulated housing and labor markets. Wefocus particular attention on the question whether the circumstances sur-rounding China’s gradual transition to a free market for housing are likelyto require compensatory wage increases similar to those observed in EasternEurope.

3 An Overview Based on Micro Data

In this section we ofier some evidence bearing on the hypothesis that em-ployers in China face an excess supply of labor at current wage levels andneed not increase pecuniary compensation when the provision of subsidizedhousing is eliminated. In a world characterized by labor-market equilibrium,to a flrst approximation the cost of employer- provided housing would be ofi-set by a commensurate reduction in the monetary wage at which employeesofier their services. For this reason economists like Buckley et al. argue thatthe privatized price for a housing unit should be lower for long term residentswhose wages have presumably been depressed for many years. Conversely,housing-market reform would induce employees to raise their asking wageto cover the cost of housing. Gradual housing reform in which employersprovided housing for older workers but did not for those younger would leadto a two tier wage system in which the wages of young workers would riserapidly.

The Chinese economy is not characterized by labor-market equilibrium,however. Rather, it flts the mold of a classic two-sector economy in whichworkers in the favored nonagricultural sector receive compensation packageswell above the minimum that would induce them to remain in their current

2Lowery (1994), p. 17.

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jobs while workers in agriculture are compensated at considerably lower lev-els. Monetary wages in the favored sector remain above the level that wouldeliminate excess labor supplies because of social and political forces mandat-ing a de facto if not a legal minimum wage. Given the highly elastic supplyof labor to the high-wage sector, employers who currently provide housing atlow or nominal rent may well flnd they can reduce or eliminate this form ofcompensation without increasing monetary wages commensurately and stillhire new workers when labor demand increases. (This is not to say thatemployees for whom housing is currently provided by their units would pas-sively accept withdrawal of their housing without compensation.) In otherwords, housing-market reform may present an opportunity for a means tocircumvent de facto wage minima.

Table 1: Housing Provider by Ownership of Enterprise (percent)a

Housing ProviderEnterprise Employer Spouse’s Lives with Relative Rent orOwnership Employer (not spouse) Own

State 40.8 19.4 22.6 17.3(3424)

Collective 31.1 22.0 23.8 23.1(2821)Private 40.9 18.3 23.7 17.2

(93)Joint Venture 28.1 18.0 33.9 20.1

(1754)

aNumbers in parentheses are number of observations. Rows sum to 100%.

As table 1 shows,3 less than 25 percent of Chinese employees lived in3The data used in this study were collected in the second half of 1992 in a survey funded

in part by the Ford Foundation in a grant to the Institute of Economics of the ChineseAcademy of Social Sciences and the Labor Science Research Institute of the Ministry ofLabor of the People’s Republic of China. We are grateful to Ernst Stromsdorfer, ElizabethLi, and Jun Cao for making us aware of these data and for their help in using them. Thesurvey is a stratifled random sample of enterprises within a randomly selected sampleof locales. All major regions of China are represented, but provincial capitals are notnecessarily included. Of the major self-governing cities, only Guangdong is included in thesample. Two survey instruments were administered, one to an o–cial of each enterprise,and another to a random sample of employees of the enterprise.

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housing they either rented or owned when surveyed in the last half of 1992.Ignoring the relatively small subsample of employees of \privately" ownedflrms, we can see that, as might be expected, employees of state enterpriseswere least likely to rent or own their own residences. Employees of collectiveenterprises were about 1/3 more likely to live in housing they evidently lo-cated for themselves in the market than were employees of state enterprises,and employees of joint ventures were about 1/6 more likely to be so housed.

Table 2: Housing Expenditure by Pay Level and Providera

(Yuan per month)Gross monetary Mean Incomeb Employer or Relativesc Rent Own

pay<100d 230.31 29.14 63.64 22.3367.40 (921) (77) (184)

100-200 427.66 22.09 41.48 17.43156.82 (2568) (136) (388)200-300 427.66 22.09 41.48 17.43244.63 (1487) (47) (159)300-400 785.78 33.88 56.35 24.98345.90 (371) (17) (49)>400 1212.22 56.19 66.19 44.27532.65 (230) (26) (26)

aNumbers in parentheses are number of observations.bMean gross monetary incomecHousing provided by employer, spouse’s employer, or relativesdTop line is gross monetary pay range; second line is mean.

Table 2 shows how monthly housing expenditure varied by level of pay,household income, and provider of housing. Housing expenditure includespayments for water and electricity, so even workers living in housing pro-vided by a work unit are likely to report some outlay, as are those who owntheir own housing units. Housing expenditure in all ownership categoriesappears to be higher in the group reporting the lowest pay and family in-come than in the next higher group. There may be some anomaly in thispay/income category, because gross pay less than 100 yuan per month isimplausible for full-time workers. Except for the lowest-pay group, employ-ees who are non-renters increase their housing expenditure (presumably on

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utilities) consistently as their incomes rise. Comparing the highest incomegroup with the second lowest, housing expenditure is 2.5 higher and meanhousehold income is 2.8 times greater. Among renters, however, monthlyhousing expenditure is only about 1.6 times greater in the highest monthlyincome group than in households in the second highest category, and reportedhousing expenditure does not increase uniformly as income rises.

Table 3: Monthly Housing Expenditure, Pay, and Household Income a

Urban Residents (Yuan per month)Length of residence less than 4 years Length of residence 4 years or more

Housing Gross Payb Gross Housing Gross Pay Gross HousingProvider Incomec Expensed Income ExpenseEmployer 222.68 682.19 17.64 236.11 489.98 24.98

(56) [205.04] (1515) [211.13]Spouse’s 232.20 469.86 20.90 198.77 479.49 26.54Employer (20) [211.30] (955) [172.23]Parents or 170.88 554.46 38.75 181.43 580.42 30.45Relative (8) [132.13] (1112) [150.98]

Rent 177.64 474.29 52.14 201.09 492.17 50.64(14) [125.50] (183) [150.45]

Own 180.56 442.85 13.33 194.20 512.14 19.62(9) [167.23] (527) [174.58]

aNumbers in parentheses are number of observations. Urban and rural residence aredeflned on the basis of examination of location codes, with urban deflned to be provincialcapitals and major cities.

bGross pay includes bonuses.cEntire householddFigures in brackets are gross pay less housing expense.

Tables 3 (urban residents) and 4 (rural residents) describe the relation-ship between housing expenditure and income from a somewhat difierentangle.4 They are designed to answer the question, \How much additionalmonetary compensation do employers need to pay workers for whom they donot provide housing?" The somewhat surprising answer is that there is no

4The rural- urban distinction is an ad hoc one based on examination of the localitycodes reported in the survey instruments. The rural designation does not necessarily meanresidence in a village, but may be a small town, as well.

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Table 4: Monthly Housing Expenditure, Pay, and Household Income a

Rural Residents(Yuan per month)

Length of residence less than 4 years Length of residence 4 years or moreHousing Gross Payb Gross Housing Gross Pay Gross HousingProvider Incomec Expensed Income ExpenseEmployer 199.82 508.03 12.65 247.41 521.86 21.25

(17) [187.17] (377) [226.16]Spouse’s 246.20 586.33 26.80 237.88 536.10 27.29Employer (5) [219.40] (137) [210.59]Parents or 349.50 925.00 32.50 210.86 648.10 27.90Relative (2) [317.00] (113) [182.96]

Rent { { { 254.15 539.63 56.62(0) (13) [197.53]

Own 224.00 637.39 18.75 251.00 651.52 20.73(4) [205.25] (70) [230.27]

aNumbers in parentheses are number of observations. Urban and rural residence aredeflned on the basis of examination of location codes, with urban deflned to be provincialcapitals and major cities.

bGross pay includes bonuses.cEntire householddFigures in brackets are gross pay less housing expense.

simple evidence of a compensating wage premium for the absence of \free"housing. Even though renters report higher monthly housing outlays thannonrenters, by 60% or more, both urban and rural renters uniformly reportlower pay net of housing expenditure than nonrenters who live in housingprovided by either their own or their spouse’s employer. A similar pattern isobserved for gross family income net of housing expenditure. Given the rela-tively small sample sizes, it is not possible to say with much confldence thatrecent arrivals pay higher rent than those who have resided in their presentlocations for 4 or more years, nor is there a remarkable difierence betweenexpenditure of rural and urban renters.

As we suggested above, a possible reason for a lack compensating dif-ferential pay to workers who rent their own housing is a substantial excesssupply of labor to nonagricultural employers (which may be especially pro-

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nounced in urban areas). Conventional wisdom is that perhaps 100,000,000rural residents are constrained to \°oat" from one area to another, takingcasual employment when they can flnd it. (Maurer-Fazio, 1995)

4 A Model of Housing Demand and House-hold Labor Supply

In order to explore further the hypothesis that renters receive no compensat-ing wages for having to provide their own housing, it is necessary to controlfor other variables determining pay. In doing so, we must address the issueof simultaneous determination of housing expenditure and labor supply, andhence housing expenditure and income. In the existing literature, there areseveral approaches to the relationship between housing demand and laborsupply. One approach is to derive behavioral relationships from the individ-ual’s constrained optimization problem. See, for example, Ioannides (1988),Kohlhase (1986) and Yoshikawa and Ohtake (1989) for some illustrations ofthis approach. Here we use Kohlhase’s approach to illustrate how to inte-grate labor supply and housing demand within a unifled consumer-demandframework. We will frame our discussion in terms of a one-earner family.

Assume that a one-earner household faces the problem of choosing workhours, housing services, and a composite good to maximize utility given thebudget constraint. This can be formulated as follows:

max U = U(L; h; x)subject to wT + N = wL+ phh+ x (1)

where N is non-wage income,T is total time available to each individual,L is leisure,w is the wage rate,ph is the rental price of a unit of housing space.h is the quantity of housing space, andx is a Hicksian composite good deflned as expenditures net of housing.For convenience, we can deflne full income F as

F = wT + N: (2)

F is all one can \purchase" in terms of leisure, housing, and the compositegood, given the current wage rate, non-wage income, and total available time.

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Since we are considering the individual’s maximization problem, we treat thewage rate and rental price of housing as predetermined.

Specifying a generalized translog indirect utility function in F and prices,(1) yields a linear translog demand system in leisure, housing, and compositegood as follows:

Demand for leisure:

L = °l +(fil + flhl ln ph + flll lnw)(F ¡ °1w ¡ °hph ¡ °x)

w(3)

Demand for housing:

h = °h +(fih + flhh ln ph + fllh lnw)(F ¡ °lw ¡ °hph ¡ °x)

ph(4)

Demand for the composite good :

x = °x + (filw + flhx ln ph + fllx lnw)(F ¡ °lw ¡ °hph ¡ °x) (5)

Note that one can obtain the supply of labor by simply subtracting demandfor leisure from total time available T .

This simultaneous equation system has several restrictions on the param-eters, namely the following:

Pfii = 1, flij = flji,

Pfli = 0 for all j. Given the

budget constraint, one of the equations is redundant, and thus any two of theequations 3, 4, and 5 can be selected for estimation. Because we are inter-ested in labor supply and housing demand, the natural choice is to estimateequations 3 and 4.

Direct application of equations 3 and 4 is not plausible given the dataavailable. The wage rate w and housing price ph are not well deflned inour data, and probably in principle are di–cult if not impossible to measureaccurately in Chinese data given current labor- and housing-market institu-tions. Moreover, we believe that the model as formulated above is too simpleto capture some important aspects of current Chinese labor- and housing-markets. We therefore estimate a generalized linear system based on theabove model. Assadian and Onrich (1993) in their study of housing demand,labor supply, and residential location take a similar approach, adding exoge-nous variables to an adaptation of Kohlhase’s along the lines we propose.Building on the foundation specifled above, then, we specify the followingsimultaneous system:

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phh = fi0 + fi1a+ fi2l + fi3y + u (6)

y = fl0 + fl1j(1) + fl2j(2) + fl3t+ fl4m+ fl5r + fl6o + fl7h+ fl8(rh) + v (7)

wherephh is housing expenditure as deflned above,a is age of the respondent,l is duration of residence,y is monthly gross pay of the respondent (w(T ¡L) in terms of the precedingdemand system,j(1) is a dummy variable = 1 if respondent is a production worker,j(2) is a dummy variable = 1 if respondent is a manager or professionalworker,t is years with current employer,m is a dummy variable = 1 if respondent is male,r is a dummy variable = 1 if household rents its current home,o is a dummy variable = 1 if household owns its home, andu and v are i:i:d: error terms.

Equation 6 relates housing expenditure to the age of the respondent, toduration of residence in the current locality, and to monthly pay. Equation7 relates monthly pay to worker-class, to tenure on current job, to the re-spondent’s sex, to the respondent’s housing status (renter, owner), and tomonthly out-of-pocket housing expenditure. The sum of coe–cients fl7 andfl8 represents the relationship between housing expenditure and monthly payfor renters. (There are too few owners in the sample to justify estimatingan interaction term between monthly housing expenditure and the dummyvariable for home ownership.)

Our hypothesis is that excess labor supply to the nonagricultural sec-tor afiects the compensation workers require for paying their own housingcosts directly, and this implies limitations on the magnitude of fl7 + fl8.We have suggested above that if monetary/housing compensation packagesroughly re°ect labor-market equilibrium and utility-maximizing equilibriumfor households, then employers who replace housing with monetary com-pensation would need to substitute 1 yuan of housing compensation with 1yuan of monetary compensation, i.e., fl7 + fl8 = 1. The excess labor-supplyhypothesis implies that fl7 + fl8 < 1.

An alternative to the excess labor supply hypothesis is that our renters’data have nothing to do with employers’ substitution of monetary compen-

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sation for housing, but rather the data simply re°ect equilibrium choices ashouseholds respond to housing-market and income constraints in their spend-ing and housing-choice decisions. For example, consider the implication ofthe following stylized fact, which is roughly consistent with the data in ta-ble 3. In a situation characterized by a system such as that described byequations 1 through 5, we might expect the income elasticity of demand forhousing to be roughly unity with a constant share of housing expenditurein income and –h=–y = h=y. This would imply that 1=(fl7 + fl8) is approx-imately equal to the share of housing expenditure in income, or somethingin the neighborhood of approximately 0.2 based on data for renters in ta-ble 3, or that fl7 + fl8 is approximately equal to 5. If we estimate fl7 + fl8

to be \much" smaller than this magnitude, implying an implausibly largemagnitude of the \marginal propensity to spend on housing," perhaps evengreater than unity, we may take this as evidence rejecting this alternativeequilibrium housing-choice hypothesis.

When equations 6 and 7 are estimated by two-stage least squares, weflnd that the flrst-stage equation for h yields an adjusted r2 of only 0.03.Furthermore we conduct a Hausman test for exogeneity suggested in Maddala(1992, p. 395). The result of this test implies that the null that h is exogenouscannot be rejected at any reasonable level. 5 We therefore conclude that thesimultaneous approach is unwarranted in this case and present the results ofOLS estimation of equation 7 in table 5. Separate regressions were run forurban and rural residents.

The regression results reported in table 5 are quite satisfactory with ac-ceptable adjusted R2 (given the disaggregate nature of the sample) and rea-sonable magnitudes for the job-category, tenure, and sex variables. The netrelationship between monthly pay and housing expenditure for renters, asre°ected in the sum of the coe–cients of the renter and renter x housingexpenditure variables, is 0.7 for urban residents and 0.3 for rural residents

5Brie°y, the test is as follows. The fltted value of h, h from the reduced form impliedby equations 6 and 7 is included in equation 7 instead of the original value of h. Equation7 is then estimated by OLS. The Hausman speciflcation test for exogeneity as describedin Maddala (1992, p. 395) is based on whether the coe–cient of h is signiflcant. The p-values are around 0.2 for the rural sample and 0.8 for the urban sample. To rule out thepossibility that insigniflcance of h is caused simply by the presence of other insigniflcantvariables, a simple sensitivity test is conducted by omitting insigniflcant variables otherthan h from the equation until all remaining variables other than h are signiflcant. Thep-values change little when this is done, remaining around 0.2 and 0.8, respectively, forthe rural and urban samples.

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Table 5: OLS Regression Analysis of Gross Monthly Pay

Regression Coe–cientsa

Variableb Urban Sample Rural SampleIntercept 118.6 110.2

(21.40) (6.28)Production Job -0.21 26.2

(0.04) (1.72)Managerial or 19.04 45.8

Professional job (3.56) (2.94)Years with 2.13 1.98Employer (15.49) (4.62)

Male 29.4 26.6(11.4) (3.14)

Renter -8.71 43.8(0.91) (1.03)

Owner -0.48 13.0(0.12) (0.94)

Housing expenditure 1.14 1.90(22.00) (8.22)

Housing expenditure -0.44 -1.6x Renter Dummy (2.79) (2.44)

Resident 21.89 -3.84 years or more (2.68) (0.18)

Adj. R2 0.18 0.12Sample Size 4886 850

aNumbers in parentheses are absolute t-statistics.bOmitted job category is non-production service. All other variables are identical to

those used in tables 3 and 4.

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with t statistics of 4.67 and 0.5, respectively. (The t-statistic is joint for thesum.) The implication is that for every marginal yuan of monthly rentalexpense, urban renters receive only 0.7 yuan additional monetary compen-sation or that an increase in income of 1 yuan leads to an additional 1.4yuan expenditure on housing. Obviously, we reject the hypothesis that ur-ban renters receive no compensation for not having owner-provided housing.However, neither do they receive full compensation. The probability that acoe–cient of 0.7 or smaller would be estimated if the true value is 1.0 is only0.0125.6 We also reject the hypothesis that the observed expenditure-incomerelationship is simply the inverse of the \marginal propensity to spend" onhousing, because the implied value is implausibly large. For rural renters,we cannot reject the null hypothesis that no extra monetary compensation isrequired for the absence of employer- provided housing at all, and the implied\marginal propensity to spend" on housing would be very large indeed. Thus,we flnd the estimates for both urban and rural renters to be inconsistent withany reasonable magnitude based on a standard utility-maximization frame-work in which housing expenditures and labor supply represent equilibriummagnitudes. The conclusion we draw, then, is that the survey data are con-sistent with the excess labor supply hypothesis and the cruder impressionsderived from tables 3 and 4: employers need not pay a premium to attractnew employees if they do not provide housing.

On flrst examination, it appears that the essentially zero marginal com-pensatory wage for rural renters compared to the signiflcantly positive com-pensation of 70 percent for urban renters is contrary to the spirit of our duallabor market hypothesis, which is traditionally applied to the case of urbanversus rural employment. This apparent anomaly may simply be an arti-fact of the relatively small number of observations of rural residents in oursample. If, however, the marginal product of labor in agriculture (at currenthousehold and plot sizes) is extremely low, or even zero, except at harvestand planting time, and if rural-industry employment allows workers to en-gage in essential agricultural work during periods of peak demand, then thewages received in rural-industry employment may well represent a substantialpremium over opportunity cost and thus represent a form of labor-marketduality.

6A one-tail test is appropriate to test this null, given that either greater or smallervalues than unity are theoretically possible.

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5 Interprovincial Migration and Housing De-mand

In the previous sections we explored the relationship between household laborsupply and housing expenditure at the micro level. We focused on whetherthe relationship between housing expenditure and wage income exhibit char-acteristics that would be expected if both labor and housing markets in Chinawere in equilibrium. In this section we approach the relationship betweenhousing and labor markets from the perspective of interprovincial migration.Admittedly, the dual-market hypothesis explored in the preceding sections isbased on a rural-urban dichotomy, and our interprovincial perspective cutsacross both urban and rural markets. However, there is considerable evi-dence of persistent regional as well as sectoral disequilibrium in the Chineseeconomy, particularly between the coastal and interior provinces. (See, forexample, Chen and Fleisher, 1996, and Fleisher and Chen, 1996.) There-fore, we believe the same arguments pertaining to the relationship betweenthe pecuniary and housing components of worker compensation apply to theinterprovincial case.

We develop a simple recursive model of migration and housing, in whichinterprovincial migration depends on relative economic conditions, the costof housing, and other amenities associated with favored provincial locations.In the flrst stage of the recursive model, the price and quantity of housingare determined by demand and supply as follows:

Housing Demand

HDjt = fi0 ¡ fi1Pjt + fi2Yjt + fi3Njt + ujt (8)

Housing Supply

HSjt = fl0 + fl1Pjt ¡ fl2Xjt + vjt (9)

where HD and HS are measured as total housing stock measured in squaremeters,P is the annual rental price of housing,Y is per-capita real GDP,X is a measure of construction cost,j and t are provincial and time (year) indicators, respectively, andfi1; fi2; fl2 > 0.

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Setting HD = HS and solving for the equilibrium price, we obtain the re-duced forms for the rental price of housing and housing quantity, respectively.

Pjt =1

fi1 + fl1[(fi0 ¡ fl0) + fi2Yjt + fi3Njt + fl2Xjt + ujt ¡ vjt] : (10)

Hjt =1

fi1 + fl1[fi0fl1 + fl0fi1 + fl1fi2Yjt + fl1fi3N ¡ fi1fl2Xjt + fl1ujt ¡ fi1vjt]

(11)Given the limited amount of interprovincial migration that currently ex-

ists in China, we feel justifled in treating Y and P as predetermined in thethird equation of our recursive housing-migration model,

Mjt = °0 + °1Yjt ¡ °2Pjt +X

°jRDj + †jt (12)

whereM is net migration, RDj are regional dummies for coastal provinces as-sumed to be favored destinations for reasons other than income, and °1; °2; °3 > 0.

Furthermore, examination of the signs of the estimated coe–cients ofequations 10 and 11, in particular the coe–cient of construction cost in equa-tion 10, provides a further a test for the exogeneity of P . If housing rentalsrepresent an approximation of equilibrium prices, then in the long run theywill be positively correlated with the cost of providing housing, particularlywith construction cost of housing. If the null hypothesis fl2 = 0 cannot berejected (or if it is rejected, but fl2 < 0), then the equilibrium hypothesis canbe rejected, and we will treat this as further evidence that housing rentalrates can be treated as exogenous to migration decisions. If the null thatthe coe–cient of construction cost in equation 11 is zero cannot be rejected,then we treat that as evidence that housing rents are set administratively,as above, and/or that the quantity of housing demanded does not, underpresent circumstances in China, respond to the amount paid in rent. If thelatter is true, then may construe households as determining non-housing ex-penditures on the basis of pecuniary income net of the amount spent onhousing, which is exogenously determined.

The econometric estimates of equations 10 and 11 are reported in table6 for all provinces excluding Jilin, Hainan, and Tibet, which are excludeddue to missing data. Housing rental price P is measured as expenditure,because there are no data on housing space by province after 1989.7 In table

7Given the small variation in the allocation of urban housing space per capita, webelieve that substituting expenditure for price is a reasonable approximation.

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Table 6: Estimate of Reduced-Form Housing Equations a

Dependent variablesb

(absolute t-statistics)Independent Variables P (1991) P (1993) H (1989)Constant 8.42 85.93 -14,386

(1.53) (1.34) (1.07)Y 0.34 2.16 62.2

(3.80) (2.14) (0.3)N 0.00024 0.0052 15.8

(0.74) (1.40) (19.5)X -0.013 -0.23 15.9

(0.64) (1.01) (0.32)Adj. R2 0.50 0.24 0.95

aSample includes all provinces except Jilin, Hainan, and Tibet, which are excluded dueto lack of data. Anhui is omitted due to data anomalies.

bFor full variable deflnitions and data sources, see Appendix.

6we report estimates for equation10using both the 1991 and 1993 valuesfor per-capita housing expenditure, and the results are remarkably similar.The difierence in magnitude of the regression coe–cients can be explainedlargely as a result of the increase in mean per-capita housing expenditurebetween 1991 and 1993.8 The coe–cient of the construction-cost variable,X , is insigniflcant in both cases. On the basis of econometric results reportedin table 6 we reject the hypothesis that housing rental prices and quantitiesfor the vast majority of Chinese households respond to market forces. Rather,they appear to be administratively determined according to rules that do notre°ect proflt maximization in the provision of housing on the part of housingproviders.

The econometric results reported in table 7 show that migration is di-rected toward provinces with higher GDP/capita, consistent with a conven-tional hypothesis on the economic motive for labor-force mobility. Thereis no evidence, however, of a negative correlation between interprovincialmigration and the rental price of housing.

8Mean per-capita expenditure was approximately 11 yuan in 1991 and approximately76 yuan in 1994.

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Table 7: Estimates of Migration Equationa

Dependent Variable(absolute t-statistics)

Migration 1993 Migration 1991-93Independent VariablesConstant -0.0019 -0.0040

(2.18) (2.05)Y 0.0001 0.00049

(1.05) (3.37)P 0.0001 0.00006

(1.86) (0.41)Coast -0.0008 -0.0026

(1.17) (1.54)Beijing 0.0046 0.006

(2.47) (1.42)Shanghai -0.0029 -0.015

(0.78) (1.78)Guangdong 0.039 -0.004

(30.3) (1.37)Adj. R2 0.98 0.78

aSample includes all provinces except Jilin, Hainan, and Tibet, which are excluded dueto lack of data.

6 Conclusions

Our evidence does not support a hypothesis of equilibrium in China’s laboror housing markets. Rather the data point to a dual labor market in whichexcess labor supply to favored industrial jobs and favored locations permitstownship and urban employers to reduce compensation (wages plus housingbeneflts) while maintaining current employment levels. Evidently, such areduction is already occurring as re°ected in the relationships we have es-timated between monetary pay and monthly housing expenditure for urbanrenters.

The evidence derived from an estimated labor supply equation based onmicro data (equation 7) suggests the following: Chinese employers are notraising pay to fully compensate workers for increased costs they must pay for

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their own housing. We infer that for most families the price paid for housingservices and the quantity consumed are administratively set. Thus, housingexpenditure is exogenously determined in household budgets. In urban areas,the pressure of excess supply from rural immigrants does not compel employ-ers to fully compensate workers for housing services when employers to donot provide them in kind. In rural areas, employers can evidently hire froma secondary labor force that is underemployed in agriculture. The locationof township factories in areas where farm families can obtain second jobsin villages allows employers to ofier employment to some workers withoutcompensatory pecuniary wages when housing is not provided.

Evidence from the reduced-form housing supply and migration equationsbased on provincial data (equations 11 and 10 shows that interprovincial mi-gration decisions are not determined by housing costs, although they may bedetermined by housing availability. The positive and marginally signiflcant(for 1993) coe–cient, P , in table 7 indicates that rents are probably set be-low market equilibrium. Higher rents increase the available housing, which,in turn, facilitates immigration.

Liberalizing housing markets is a critical step in alleviating China’s gener-ally acknowledged problem of severe unemployment and its so-called \°oatingpopulation" in urban areas. Creating a normal market in housing would leadto increased rents, an increased housing stock, and more e–cient allocationof existing housing space. The dilemma for Chinese policy makers is thattransition to privatized housing will mean greater inequality if current resi-dents are not required to pay for the full value of the apartments they occupy.Already an excess supply of labor makes it unnecessary for employers to paywage premiums to workers left increasingly to flnd housing on their own. Agradual increase in the rents charged by municipalities and a gradual privati-zation seem more reasonable than the voucher plan advocated by the authorscited in section 2. A necessary concomitant to the transition will be strictenforcement of housing standards and the development of flrms/cooperativesto maintain the large apartment blocs that are required in China’s denselypopulated urban areas.

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References

Assadian, A. and J. Onrich, \Residential location, Housing Demand andLabour Supply Decisions of One- and Two-Earner Households: The Case ofBogota, Colombia," Urban Studies30:73-86

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Buckley, Robert M.; Hendershott, Patric H.; and Villani, Kevin E. Forth-coming. \Rapid Housing Privatization in Reforming Economies: Pay theSpecial Dividend Now." Journal of Real Estate Finance and Economics, 10(1995), 63-80.

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McKinnon, Ronald. The Order of Economic Liberalization and FinancialControl in the Transition to a Market Economy. Johns Hopkins Univ. Press,1991.

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Appendix: Data Sources for tables 6 and 7

P . Statistical Yearbook of China. Urban Household Annual LivingExpenditures Per Capita by Region, House Rent. No data area availableafter 1989 for per-capita housing space. We therefore use expenditure as aproxy for price. This should be a reasonable approximation of price, giventhe small variation in allocations of urban housing space per capita.

H . State Statistical Bureau, Quanguo gesheng zishiqu zhixiashi lishitongji ziliao huibian 1949-1989 (Compilation of provincial economic statis-tics). Beijing: Chinese Statistics Press, 1991.

Y . Gross Domestic Product, Guonei shengchan zongzhi Real GDPIndices at Comparable Prices, Shiji guonei shenchan zongzhi. The indices atcomparable prices are used in conjunction with Gross Domestic Product andprovincial population data to derive a measure of real per-capita GDP. Thereal indices and resulting de°ators are linked to the base year (1950), but donot re°ect base year interprovincial price-level difierences.

N . Statistical Yearbook of China. Population by province

X . Statistical Yearbook of China. Construction Output Value of Build-ing, Floor Space of Buildings Under Construction and Completed.

Migration rate. Statistical Yearbook of China. The migration rate to aprovince j in year t is deflned as popj;t¡popj;t¡1(1+gj;t)

popj;t¡1, where g is the rate of

natural increase (birth rate less death rate). Migration over a multiple-yearperiod uses the initial-year population and rates of natural increase for eachyear between the initial year and the flnal year.

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