Rural Pensions, Labor Reallocation, and Aggregate Income: An Empirical and Quantitative Analysis of China

Qingen Gai | Naijia Guo | Bingjing Li | Qinghua Shi | Xiaodong Zhu

Mar 04. 2025

Key Takeaways

This study examines the impact of China’s New Rural Pension Scheme (NRPS) on labor reallocation, sectoral productivity gaps, and aggregate economic outcomes.
The NRPS increased by 4.2 percentage points the likelihood of young workers from pension-eligible households securing urban non-agricultural employment.
Migrants induced by the NRPS experienced an 86-log-point increase in daily earnings, reflecting previously high migration costs.
Scaling up rural pension transfers fivefold is estimated to increase migrant labor supply by 6.6%, boost GDP by 4.2%, and reduce elderly rural labor supply by 73%, leading to a 28.5% rise in aggregate welfare.
Migration costs, primarily shaped by the hukou system, are key determinants of the agricultural productivity gap (APG). Hukou reforms could raise migration rates by 2.8 percentage points, increase GDP by 2.04 percentage points, and reduce the APG by 46%.
Whereas the NRPS enhances GDP by reducing within-household labor misallocation and increasing aggregate labor supply, migration policy reform achieves GDP growth through sectoral labor reallocation.

Source Publication: Qingen Gai, Naijia Guo, Bingjing Li, Qinghua Shi and Xiaodong Zhu (2024) Rural Pensions, Labor Reallocation, and Aggregate Income: An Empirical and Quantitative Analysis of China. SSRN Working Paper.

Addressing Labor Market Inefficiencies

Labor misallocation remains a persistent challenge in developing economies, with many workers trapped in low-productivity agricultural jobs despite higher returns in urban sectors. In China, this sectoral productivity gap is exacerbated by high migration costs and institutional constraints, particularly the hukou system, which restricts rural workers’ access to urban benefits. This study explores how the New Rural Pension Scheme (NRPS), introduced in 2009, influenced migration patterns and economic outcomes by providing pension income to rural elderly, thereby increasing the rural-to-urban migration of younger household members. By reducing within-household labor misallocations, the NRPS has facilitated labor reallocation, increasing productivity and national income. The findings offer crucial policy insights for economies facing similar labor frictions.

Data and Methodology

The analysis is based on China’s National Fixed Point Survey of Agriculture (NFP), a large-scale panel dataset tracking 80,000 agricultural and migrant workers between 2003 and 2013. Leveraging the staggered rollout of NRPS and interacting it with the presence of pension-eligible elderly household members as an instrumental variable, the authors estimate the effect of migration on labor earnings. Additionally, they apply a control function approach to estimate the average treatment effect (ATE) of migration, accounting for selection bias. They further develop and estimate a model with joint household production in agriculture, shared home production, endogenous labor supply, and labor sorting across sectors that can help interpret the empirical results and quantify the aggregate effects of rural pensions in China.

Findings: How Rural Pensions Reshape Labor Markets

The results reveal NRPS significantly reshaped labor dynamics in rural China. Following the implementation of the NRPS, young workers from households with pension-eligible elderly members are 4.2 percentage points more likely to be employed in urban non-agricultural sectors than their counterparts from households without a pension-eligible elderly member. The NRPS also decreased the labor days of pension-eligible elderly while increasing the labor days of young members within their households. These findings point to a potential mechanism through which the NRPS induces migration. The NRPS generates an income effect that allows older workers to reduce their labor supply and dedicate more time to home production. Consequently, young workers in these households can decrease their home production time and increase their labor supply in market production, thereby enhancing the incentive for migration to the non-agricultural sector. Thus, the NRPS effectively reduces the migration costs of young workers in households with pension-eligible family members.

As shown in Table 2, the local average treatment effect (LATE) estimate reveals an average increase of 86 log points in daily earnings for NRPS-induced migrants. This result suggests workers who were affected by the NRPS faced high migration costs prior to the introduction of the pension policy. The ATE estimate is 33 log points, indicating a significant underlying agricultural productivity gap (APG) in China. The estimated ATE is close to the ordinary least squares (OLS) estimate of returns to migration (31 log points), suggesting sorting plays a minor role in explaining the observed APG in China.

Consistent with our reduced-form results, our structural estimation reveals high migration costs are the main reason for the large observed APG in China, with sorting playing a minor role. The structural model illustrates how the rural pension policy influences migration, GDP, and welfare through improving within-household labor allocation. Given that older workers typically have a comparative advantage in home production, our model predicts the introduction of the NRPS not only encourages migration across sectors, but also drives reallocation of labor supply from older to younger household members, which mitigates within-family labor misallocation, thereby enhancing overall household welfare.

Policy Implications: Unlocking Labor Mobility for Growth

The findings highlight two key policy levers for improving labor market efficiency and economic growth. First, expanding rural pensions can play a crucial role in strengthening labor markets. As shown in Table 7, the NRPS increases aggregate labor supply by 2.0% and GDP by 2.4%. Consequently, aggregate welfare, measured by consumption expenditure equivalents, increases by 15%. Scaling up the pension policy further by raising the pension transfer amount fivefold would additionally increase migrants’ labor supply by 6.6%, GDP by 4.2%, and aggregate welfare by 28.5%.

The estimation shows migration costs in China are systematically related to the hukou policy. Another policy we consider is a hypothetical migration policy reform that allows all cities in China to adopt the most liberal hukou policy observed in the data. Our counterfactual analysis suggests the hukou policy reform would increase the migration rate by 2.8 percentage points and GDP by 2.04 percentage points, while lowering the observed APG by 46%.

These quantitative results demonstrate the effect of the NRPS on GDP is comparable to the effect of a migration policy reform that enables all cities to adopt the most liberal policy observed in the data. However, these two policy reforms exert their effects along different margins. Our decomposition analyses show the NRPS increases GDP primarily through reducing within-household labor misallocation and increasing aggregate labor supply, whereas the migration policy reform affects GDP through sectoral labor reallocation.

These findings offer important lessons for policymakers in China and other developing economies. Labor misallocation remains a structural drag on growth, but targeted policies—such as pension expansion and migration reform—can help reallocate labor more efficiently, unlocking substantial economic gains.