APPLIED MICRO: Professor Najia Guo (University of Hong Kong)

Migration Restrictions and the Migrant-Native Wage Gap: The Roles of Wage Setting and Sorting

We study the wage gap between internal migrants and native workers in China's urban labor market. Using employer-employee-linked administrative records from a large city, we estimate a two-way fixed effects model and decompose the average migrant-native wage gap. Compared to natives with the same skills, migrants receive lower pay from the same employers and are less likely to be employed by high-premium employers. These wage setting and sorting effects contribute to an 8.7-log-point wage penalty for migrants. We then study the role of employer-sponsored hukou (household registration) quotas in determining the wage gap. Following a policy change that decreased the number of quotas by 40%, migrants' wages relative to natives increased by 5.3 log points. The decrease in quotas reduced workplace amenities for migrants, whose earnings increased relative to natives as predicted by the theory of compensating wage differentials. This rise in the wage-setting effect was especially notable among the young, the skilled, and those in the private sector. The quota tightening also induced high-skilled migrants to shift towards the public sector, which was less affected by the quota reduction but on average paid a lower wage premium, and hence, the sorting effect worsened for the migrants. Based on a wage-posting model, we estimate the willingness-to-pay for a quota to be between 2.2 and 3.7 times the average annual earnings.