The Decline of China’s Agricultural Labor force Share Yang Chengyu Beijing Normal University June 15th, Budapest

Motivations Since the late 1970s, the labor share in agricultural sector has experienced a period of significant decline: the share of agriculture labor force decline from 70.7% in 1978 to 36% in Faster than the average of OECD, following the same styles of Korea and Taiwan.

Agriculture Labor Share in % Solid: actual, Dashed: segmented linear trend

International Comparison 1880s-1990s Japan, Korea, China Taiwan, OECD, China

Research Questions What are the main reasons for the decline in China’s agricultural labor share? Will China’s agricultural labor share continue to decline and how?

Brief Literature Review Difference in sector productivities Baumol (1967), Ngai and Pissarides (2007) Change in consumption preference Kongsamut et al. (2001) Government intervention Imrohoroglu et al. (2012), Duarte and Restuccia (2010), Rogerson (2008)

This paper A two-sector general equilibrium model Differences in sector labor productivities

Theoretical Background According to the Standard Neo-Classical theory, the structural change of industry is driven by both the supply and demand side of the economy. On the supply side, the transition of labor force is driven by the different sector productivities. On the demand side, the Engle’s law is another main factor that contribute to the sector transition of the labor force. The institutional factors: Hukou, Market Oriented Economy and the personal credit system.

Measurement: Sector productivity Average Productivity vs Total Factor Productivity Identification errors and neglecting of human capital  underestimate of agricultural work time  overestimate of agricultural productivity Gollin et al. (2012)

Average labor productivities in Agricultural and non-agricultural sectors ( ) Solid: Non-Agri, Marked: Agriculture

Change Rates of Sector Productivity Bold: Non-agri Thin: Agricultural

Change Rates of Agricultural Labor Share in % 数据来源 : 国家统计局

Government Intervention Nominal rete of assistance (NRA) - Price regulation, subsidies, agricultural product sales policies - Exchange rate, trade protection policies Relative rate of assistance (RRA)

Government Intervention: Relative Rate of Assistance (RRA) Data source: World Bank 数据来源 : 世界银行

The Basic Model

Simulation Result: Basic Model Solid: Actual, Dashed: Simulated

Model with Government Interference Following Imrohoroglu et.al. (2012) we assume that agricultural sector need non- agricultural products “X” as intermediate input to produce Agricultural goods as well as labor force. However, the government can intervene the relative price, to the non- agricultural good.

Model with Government Intervention: firm The price of the intermediate goods X is set to by the government The problem faced by Agriculture sector is: The second equation hold because of the foc of non-agricultural sector’s problem

Model with Government intervention

Model Simulation with Government Intervention Solid: actual, Dashed: simulated

Estimate the growth of sector productivity Estimation of sector labor productivity growth AgricultureNon-agriculture Growth rate 0.041***0.065*** Standard error （ ） Constant term *** *** Standard error （ ）（ ） R^

Estimate and forecast of the share of agriculture labor force

Main Findings 1. The change and difference of sector productivity is the main driving force of labor force sector transition. 2. In the future, this process will continue, but the speed will slow down.