Labor Mobility and Resource Allocation Efficiency: Evidence from the Hukou Reform in China

We examine how labor mobility impacts resource allocation efficiency across firms, developing a model that links labor mobility to productivity distribution. Using the Hukou reform in China as an exogenous shock to labor mobility, we empirically validate the model's predictions. The findings show that increased labor mobility reduces productivity dispersion within province-industry and raises average productivity, enhancing resource allocation efficiency. Further analyses reveal that the reform increases the sensitivity of firm employment scale to productivity. These results highlight the pivotal role of labor mobility in improving resource allocation and offer valuable insights for policies fostering economic efficiency.