Structural change in China: the role of factor market distortions

This paper proposes a systematic accounting framework to decompose the reallocation of labour out of agriculture into factor market distortions and market-driven forces. The findings are twofold. First, the removal of factor market distortions is a dominant driving force of the structural change in China in the last decades, which contributes 50.52%, and market-driven forces account for the rest 49.48%. Second, the contribution of market-driven forces has been increasing with the deepening of market-oriented reforms, while the impact of the removal of factor market distortions has been decreasing especially along with the slowdown of labour market reforms after China joined the WTO in 2001. The results imply that further reforms that aim at correcting factor market distortions could still be an important impetus of structural change in the future.