Institution and inequality: The hukou system in China

We examine the impact of China's hukou system, which is an institution controlling population movement, on social and economic outcomes at the individual level. Using data from a recent Chinese household survey, we find that people who obtained urban hukou late in their lives fared significantly less well than other urban residents. They have fewer years of education, are less likely to hold state sector jobs and to have employer-provided healthcare benefits, and are more likely to be self-employed or unemployed. A rural-urban comparison that controls for factors commonly believed to affect migration decision reveals that the two major contributing factors to rural-urban inequality are low educational attainment among rural population and low rewards to education in rural employment. Since the hukou system denies rural population the access to education and urban employment, we argue that the hukou system is a major contributing factor to rural-urban inequality. We also estimate the value of an urban hukou to rural individuals.