THE RISE OF RURAL-TO-RURAL LABOR MARKETS IN CHINA

dummy variable is assigned the value one as a way to capture its willingness to hire
workers which may have lower human capital characteristics, which also characterize
those in the incoming migrant labor force. A dummy variable indicating the presence of
private firms is included and is expected to measure the difficulty in imposing hire-own-
village-first restrictions on local managers, a factor that should lead to increased hiring of
incoming workers. The size of the labor force and the quantity of arable land in the
village measure the extent of the village’s own resource endowment, and in the presence
of restrictions will affect how much labor can be hired out of the one village labor pool
and how many workers will be seeking work off the farm.

Results

In general, the equations performed relatively well in terms of the goodness of fit
and conformance with a priori expectations (table 6). The adjusted R-square statistics
range between 0.23 and 0.41 for the equations estimated by OLS. The coefficients of
almost all regressors retain their sign and level of significance when Tobit estimators are
used. In addition to examining the demand for all incoming workers (columns 1 to 4),
tests of differences between hiring incoming commuters and incoming migrants suggest
that behavior is different enough that separate equations are analyzed for the demand for
incoming commuters (columns 4 to 8) and incoming migrants (columns 9 to 12).

Our analysis is consistent with the hypothesis of steadily improving rural labor
markets. For the 1988 estimates, the coefficient on local labor costs is insignificant in all
specifications (row 1, columns 1, 2, 5, 6, 9, and 10). In the era of high firm profits and
restricted labor markets, firm managers did not switch to incoming workers when the
local wage rose. By 1995, there are signs that the local wage is becoming a more

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