Effect of goods market segmentation on labor mobility: Evidence from China

• Published date: 01 February 2023
• Author: Dongmei Guo,Die Hu,Weizeng Sun
• Date: 01 February 2023
• DOI: http://doi.org/10.1111/rode.12925

REGULAR ARTICLE

Effect of goods market segmentation on labor

mobility: Evidence from China

Dongmei Guo

1

| Die Hu

2

| Weizeng Sun

1

1

School of Economics, Central University

of Finance and Economics,

Beijing, China

2

HSBC Business School, Peking

University, Shenzhen, China

Correspondence

Weizeng Sun, School of Economics, Central

University of Finance and Economics,

39 South College Road, Haidian District,

Beijing 100081, China.

Email: sunweizeng@gmail.com

Funding information

National Natural Science Foundation of

China, Grant/Award Number: 71903210;

National Social Science Fund Major

Project, Grant/Award Number:

21&ZD085; Program for Innovation

Research in Central University of

Finance and Economics

Abstract

This study empirically investigates the effects of goods

market segmentation on interregional labor mobility

using data from National Population Surveys in China.

The findings reveal that a one-standard deviation

increase in the goods market segmentation index

reduces interprovincial migration by 4.0%. Restraining

interregional trade and improving industrial specializa-

tion are the two mechanisms at work. Further analysis

indicates that the restrictive effect of goods market seg-

mentation is greater on highly educated laborers and

the labor flows from poorer to richer regions. The het-

erogeneous analysis also implies that migrants are

more concerned about educational resources and con-

sumption diversity.

KEYWORDS

goods market segmentation, industrial specialization,

interregional trade, labor mobility

JEL CLASSIFICATION

F16, H70, J61, R23

1|INTRODUCTION

The spatial allocation of human capital plays a vital role in improving productivity, smoothing

regional disparities, and stimulating economic growth (Bryan & Morten, 2019; Burzynski, Deu-

ster, & Docquier, 2020). However, it is often difficult to ensure well-functioning market mecha-

nisms in the reallocation of human capital. Goods market segmentation, the dispersion in retail

prices of goods driven by the difference in the degree of tradability of goods, is a factor causing

failure in market mechanisms (Barwick, Cao, & Li, 2021; Giri, 2012). To protect local firms,

Received: 10 January 2022 Revised: 23 July 2022 Accepted: 25 July 2022

DOI: 10.1111/rode.12925

Rev Dev Econ. 2023;27:423–449. wileyonlinelibrary.com/journal/rode © 2022 John Wiley & Sons Ltd. 423

governments treat nonlocals differently (e.g., restricting the issuance of business licenses, cut-

ting down subsidies, and carrying out repeated inspections of nonlocal products). The above

restrictions lead to dispersion in the price of goods sold for physical and mental needs. Contrib-

utors to market segmentation consist of geography, technology, and institutional policies

(Ding & Niu, 2019; Niu, Sun, & Zheng, 2020; Xing & Li, 2011). Institutional factors have gradu-

ally become a critical problem with the diminishing restrictions from geographical distances

and infrastructure investment.

Recent work conducted by Gray, Narciso, and Tortorici (2019) demonstrated the negative

effects of goods market segmentation on international labor mobility. However, rare studies

have focused on interregional labor mobility in one country, where geographical constraints

have significantly smaller effects. Lee (2021) investigated out-migration in rural Ethiopia, in

which agricultural price risk is a push factor. However, the mechanisms of the effects of market

segmentation on labor mobility are still not well explored. To explore the above mechanisms in

depth, a balanced panel dataset of province–pairs in China is built to examine the effect of

goods market segmentation on labor mobility.

China is currently coping with reduced efficiency in the allocation of human resources.

From 2002 to 2018, the difference in the structure of human capital across regions in China has

expanded by nearly 33%, and this gap is continuously widening. However, the speed of inter-

regional labor mobility began to slow down. Since 2015, China’s emigration growth rate has

become negative, with an annual decrease of 1.15%. The above dilemmas primarily arise from

the absence of market mechanisms in the human capital reallocation (Young, 2000). Since the

tax reforms of 1994, China has undergone a so-called prisoner’s dilemma with fragmented

interregional growth. To achieve rapid growth, local governments in China restricted resource

outflows, inserted wedges between the price of raw materials and final goods, and captured

taxes and rents generated by the price differentials, thus resulting in a reduction in interregional

trade and labor mobility (Ding & Niu, 2019; Tombe & Zhu, 2019). The above pattern of inter-

regional labor mobility and the unique feature of regional segmentation are beneficial to exam-

ine the effect of goods market segmentation on labor mobility.

This study uses data from the National Census (2000 and 2010) and the 1% National Popula-

tion Sample Survey (2005 and 2015) (hereinafter “census data”) and obtains a representative

measure of interprovincial migration defined by residents’hukou status

1

in China, thus all-

owing us to precisely identify the quality of human capital and directions of labor flows. Follow-

ing Parsley and Wei (2001) and Poncet (2003), we use retail price information from the China

Statistical Yearbook from 2000 to 2015 to calculate the goods market segmentation index at the

province–pair level. We further use the prices of four goods (including “Beverages, Tobacco,

and Liquor,”“Books, Newspapers, Magazines, and Electronic Publications,”“Fuel,”and “Medi-

cine”) to construct an exogenous market segmentation index and use the constructed index as

instrumental variables (IV) in terms of two-stage least squares (2SLS) estimation. The prices of

the above four goods are weakly determined by regional shock, thus having slight effects on res-

idential or job location choice. Besides the average effect, the channels taking effect and the het-

erogeneous effects across labor groups with different education levels and asymmetric flow

directions are also investigated.

The results of this study suggest that goods market segmentation significantly restrains

interregional labor mobility. To be specific, a one-standard deviation increase in the goods mar-

ket segmentation index reduces interprovincial migration by 4.0%. Further analysis reveals that

the restraining effect is greater for highly educated laborers and labor flows from undeveloped

to developed regions. The above findings are robust to various robustness checks.

424 GUO ET AL.