Insecure land property rights are an important constraint on migration, structural transformation, and productivity growth, as much as all other labour mobility barriers in China
Institutions and policies impeding the reallocation of labour across sectors and space are a major constraint on structural change and growth in low-income countries. A key focus of research has been identifying the effect of labour mobility barriers on productivity and the reallocation of labour, capital and land (Rosenzweig 1988, Restuccia et al. 2008). Largely ignored is the effect of land insecurity on these same outcomes, with few exceptions (de Janvry et. al. 2015). Insecure tenure discourages land rental and slows the mobility of labour out of agriculture and towards urban areas, as households remain in farming to protect their land property rights. Improved land security relaxes these constraints and can amplify the benefits from a more efficient reallocation of land through its effect on which households remain in agriculture and who operates the family farm. In recent research (Adamopoulos, Brandt, Chen, Restuccia, and Wei, 2023), we combine rich household and individual-level panel data from China with a model to assess the role of land insecurity relative to other labour mobility barriers on the sorting of workers across locations and occupations as well as on productivity growth.
Land and labour market institutions in China
China serves as a paradigmatic case. With the introduction of the Household Responsibility System in the early 1980s, rural households received use rights and residual income rights over farmland. Land was not privatised however, and ownership continued to reside in the collective, i.e. village. The allocation of village land was highly egalitarian and tied to “membership" in the village through the household registration or hukou system. The hukou system, which was established in the 1950s to control migration between the countryside and the cities, acted as an important barrier to labour mobility between the countryside and the cities (Chan 2019).
Initially, use rights were extended to households for 15 years. Through the late 1990s however, local officials often carried out village-wide reallocations of land across households to accommodate demographic changes within a village. In most villages, land rental was not officially restricted, however rental markets were thin. “Use-it-or-lose-it rules" were likely partially responsible (Giles and Mu 2018). Village leaders often regarded rental as a signal of land misallocation and viewed village land reallocations as an opportunity to redirect farmland to other households.
A series of reforms to land policy in China helped to strengthen household property rights. The Land Management Law (LML) in 1998 extended the use rights to rural households for 30 years. In 2003, the Rural Land Contracting Law (RLCL) codified legal rights of rural households for leasing out agricultural land. In 2018, a formal land titling/certification process was begun that by 2021 was largely complete.
Restrictions on migration have also been gradually reformed starting in the 1980s. The softening of the restrictions has made it easier for migrant workers to obtain working permits in the cities and other provinces. Nevertheless, rural migrants continue to face restricted access to public services once they move. High and rising housing prices in the cities also reinforce formal institutional barriers facing rural families.
The costs of hukou and land insecurity
How important were restrictions on labour mobility and land insecurity to labour allocation between agriculture and non-agriculture? Leveraging rich individual- and household-level panel data from rural China for 2004-2018 and supplementary survey work we carried out with the Research Centre for Rural Economy in China, we develop and estimate a structural model to quantify the distinct roles of land security and labour mobility frictions for agricultural productivity and structural change, and then analyse their evolution over time. We also study the link between land insecurity and misallocation in agriculture. A full description of the model can be found at the end of this article.
Using our model, we conduct two counterfactual exercises that separately eliminate land insecurity and labour mobility barriers from our 2004 benchmark economy (see Figure 1). The two frictions have nearly identical effects on migration costs: in both cases, the share of rural employment in agriculture falls by 10 percentage points. But improved land security has much larger effects on selection and agricultural productivity. With improved land security, the fraction of households who operate farms falls from 73.6% to only 28.2%, suggesting that more than half of farming households in 2004 were “zombie” farmers who operate the farm to simply avoid losing their allocated land. Moreover, there is improved selection into farming, both across and within households, reflected in the increase in the ability of the median operator of 22.1% and the assignment of higher ability family members to farming. Overall, labour productivity in agriculture improves substantially more when households have access to complete land security compared to the gains from eliminating all other labour mobility barriers – 24.7% versus 15.9%.
Figure 1: The role of land security and labour mobility barriers
The evolution of frictions over time
The survey data through 2018 allow us to assess the evolution of these frictions (see Figure 2). Setting land security in 2004 at its 2018 level, the percentage of rural households who operate farms falls substantially from 73.6% to 37.6% and the share of rural employment in agriculture falls from 56.4% to 47.6%. Selection into agriculture within households also improves. As a result, labour productivity in farming rises by 20.6%. By contrast, when we set labour mobility barriers at their 2018 level, the share of households and villagers in agriculture actually increases and labour productivity in farming falls. Our analysis implies that all the increase in labour mobility out of agriculture between 2004 and 2018 is a product of the fall in migration costs associated with improved land security.
Figure 2: The evolution of frictions over time
Land security and misallocation
In addition to land insecurity, farm households are also affected by farm-level distortions that capture all other remaining misallocation in agriculture, i.e. aspects of the land input allocation across farm households not captured by land insecurity. To examine the interaction between these frictions, we implement two other counterfactual experiments. First, starting from the baseline, we remove all idiosyncratic farm distortions for all individuals and households. Second, in addition to eliminating the idiosyncratic distortions, we remove land insecurity. Consistent with the findings in Adamopoulos et al. (2022), removing idiosyncratic distortions has a large positive effect on agricultural productivity. The striking finding is that land security has much bigger productivity effects in the economy without idiosyncratic farm distortions, illustrating an important complementarity between these two frictions.
The reason for the interaction is two-fold. First, on the extensive margin, in an economy without idiosyncratic farm distortions, land security encourages the exit of less productive farmers, resulting in a substantial increase of median log farm operator ability of 61.3%. By contrast, in the presence of residual misallocation in agriculture, selection is not nearly as strong in farming as implied by the more modest increase in median log farm operator ability (22.1%). Second, on the intensive margin, land security without idiosyncratic farm distortions enables the reallocation of land from less to more productive farms, which need not be the case with idiosyncratic distortions.
Policy implications and areas for future research
Migration costs shape resource allocation and productivity in an economy. From the perspective of China in 2004, our analysis finds that these costs were high, with land insecurity and labour mobility barriers contributing equally. Over the next 15 years, overall migration costs fell, however all the decline can be attributed to improved land security. In fact, labour mobility costs unrelated to land institutions increased slightly between 2004-2018. Despite reforms since the early 2000s to migration policy, and ostensibly, the hukou registration system, these changes have not had an impact on out-migration from agriculture, structural change and growth.
Our analysis implies that effective labour mobility barriers facing rural households remain high. This could be due to a non-uniform reform or implementation of the migration policy, e.g. it is more difficult to move to larger cities, or due to other factors that deter living in the cities such as higher housing prices. Our results indicate that there remains room for further agricultural productivity growth and structural change from reductions in other direct and indirect labour mobility barriers. As a result, future policy reforms that reduce effective rural-urban migration costs can have large welfare benefits.
Our model
A key ingredient of our model is that we allow for selection of individuals within families, across sectors, and across space.
Our framework explicitly models the land rights regime in China and how it interacts with labour mobility out of agriculture and the household decision of who operates the family farm and who migrates. To account for the large differences in individual and household choices in the micro data, our model features families and individuals comprising those families. Individuals can work in agriculture in the village as either a farm operator or as a wage worker or migrate to the cities to work in non-agriculture - household members differ in their ability in these occupations. We assume that all families are allocated the same use rights over farmland, but farmers can adjust the scale of their operation through land rentals. We capture land insecurity in the model by the risk that families lose their use rights to land they rent out; and by a family-specific perceived income loss associated with the loss of this land. Land insecurity not only deters farmers from renting out land along the intensive margin, but also deters them from completely abandoning the land in the village out of fear of losing access entirely, thus acting as a de facto barrier to labour mobility out of agriculture.
Individual labour supply choices are subject to residual idiosyncratic occupational labour mobility frictions, a catchall for all other institutions or barriers such as an individual's hukou and explicit migration costs, which may impede the mobility of workers out of agriculture and affect sorting. The model allows us to identify separately land insecurity from labour mobility frictions by exploiting the fact that land insecurity is primarily a family-level friction, manifesting through the family decision of whether to operate a farm or not, whereas the labour-mobility barrier operates at the individual level. As a result, land insecurity is pinned down empirically from the share of village families operating farms, while labour mobility barriers are linked to the sectoral income gap between agriculture and non-agriculture.
References
Adamopoulos, T, L Brandt, C Chen, D Restuccia, and X Wei (2023), "Land security and mobility frictions", National Bureau of Economic Research, No. w29666. https://www.nber.org/papers/w29666
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