The 5th NSE International Conference Brief IV
Conference Brief Ⅵ
Of Cities and Slums
In the first lecture on the afternoon of August 7, Professor Alexander Monge-Naranjo from the Federal Reserve Bank of St. Louis delivered a keynote speech entitled “Of Cities and Slums”.
This research focuses on slums in cities. Based on the historical facts, the author points out that in the process of urbanization in developing countries in Latin America, the existence of slums is a very common phenomenon, which has an important impact on the process of urbanization.
The authors constructed a model of labor markets where individuals with heterogeneous skills can choose their residential locations: rural, slums or urban. settling in the city requires a high fixed cost of housing, while a low-skilled worker feels it difficult to pay, so the slums become residential locations for those low-skilled workers to work in cities. Of course, the quality of education in slums is much lower than that in the city, so parents caring about their offspring’s human capital face a trade-off.
The authors used the framework of overlapping generations (OLG) to characterize the population and examine structural changes of an economy in the infinite horizon, including the process of urbanization, the distribution of income and skills, and the intergenerational mobility of human capital. Based on historical data from Brazil, the authors conducted numerical simulations and gave counterfactual policy analysis. The results show that if housing prices rise in cites, it will lead to an increase in the number of residents in the slums, but will not affect the structural transformation between urban and rural areas. And if the government is to prohibit slums, it is not conducive to the immigration of labor from rural to urban areas, because only high-skilled workers can afford the high housing costs in cities.
Trade Liberalization and Structural Change
In the next paper presentation, Xuan Fei from the Department of Economics at the University of California, Davis presented her research " Trade Liberalization and Structural Change: Prefectural-levels Evidence from China." In the background of economic globalization and domestic structural change in China, the author introduces geographical heterogeneity within a country and examines the role of international trade in the structural transformation in China.
First, the author measured export shock based on existing methods in the literature, and examined the impact of export shock on the manufacturing employment share in China's prefectures. There is a hump-shaped relationship in the cross-sectional data: In cities with less export shock, the share of labor force in the manufacturing sector is positively correlated with the degree of export shock, while in cities with high trade openness, that correlation is negative.
Further, the author established a multi-sector (agriculture, manufacturing, service) and multi-regional model with endogenous labor and land supply. It is assumed that manufacturing products are tradeable, while services are not, and manufacturing is more capital intensive than service. With regard to the allocation of factors, it assumes that labor moves freely among regions, and the government optimally allocates land among sectors. Capital is provided by absentee capitalists and freely allocated among sectors within regions. The model shows that trade liberalization reduces trade costs and changes the relative price of factors and their allocation, resulting in the aforementioned hump-shaped relationship.
Misallocation under Trade Liberalization
In the second keynote speech, Professor Keyu Jin from the London School of Economics and Political Science gave a presentation entitled “Misallocation under Trade Liberalization”.
The traditional view is that bilateral trade can make both countries better and openness is beneficial to a country. But this is based on the assumption that there is no friction or distortion. In fact, in developing countries such as China, the government plays a very important role in the economy. Taxation, subsidies, implicit guarantee and bailout, and unfair access of factors have caused serious economic distortions, which make the economy deviate from the efficient allocation of resources. In such circumstances, what impact would trade liberalization have? This is the main concern of Professor Keyu Jin’s speech.
The authors combine the Melitz model, which explains gains from trade, with the Hsieh and Klenow (2009) paper explaining distortions and misallocations, pointing out that trade can exacerbate the efficiency losses caused by resource misallocations. The model predicts that, whether closed or open, distortion leads to a loss in total factor productivity (TFP), and in the case of distortion, opening to trade can result in loss of efficiency. In the absence of distortions, trade liberalization can play a selecting role: high-productivity firms export, low-productivity ones exit, and economic resources flow into high-productivity firms. But with distortions, this mechanism would not function well. And it may be those low-productivity but highly subsidized firms can produce and export, while high-tax firms quit.
Technical Progress and Movements in the Labor Share
Professor Lijun Zhu from the Institute of New Structural Economics presented his working paper "Technical Progress and Movements in the Labor Share". The study integrates industrial organization and labor markets to examine the role of technical progress in the decline in labor share.
Based on historical data in the United States, the authors found that the labor share in national income has been declining in recent decades. It is pointed out that this might be due to the expansion of enterprise scale, the increase of concentration, and the low proportion of labor income of large enterprises. The authors documented three stylized facts: (i) across sectors, there is a negative correlation between change in concentration and change in the labor share; (ii) large firms usually exhibit a smaller labor share; (iii) in sectors where the labor share declines, the decline is especially strong among large firms.
Next, the authors constructed a model to explain the above facts. In the model, labor and capital are complementary production inputs, and technological progress is labor-saving. Further, the author extends the model from static to dynamic general equilibrium analysis. The results of the model show that, due to the fixed cost of using machines, high-productivity firms are more likely to adopt advanced technology and substitute labor for machines. The labor share of these firms declines. And their market share continues to expand over time. This reallocation process drives down the aggregate labor share.
Who produces“made in China”？
In the last panel session, Xiao Ma from the University of California, San Diego presented his working paper, “Who is producing ‘made in China’? The Global Impact of China's Labor Market Liberalization”. This paper examines the impact of China's Hukou system reform on China's exports growth and the world economy.
First, the author documented the data of China's inter-provincial migrations, and found that most of them flow from inland to coastal provinces, and most of the foreign labor force is in the manufacturing sector. The labor inflow share of a province is highly correlated with its export growth. To explain these facts, the author constructed a spatial general equilibrium model, introducing the location choice of the firms in a multi-sectoral trade model, and examined the allocation of labor among regions and sectors.
Then the author numerically simulated the model and presented the results of the counterfactual analysis: If China's restrictions on Hukou system remained at the level of 1990, the labor costs in coastal provinces would soar, and China's exports would decline. It would also cause welfare losses to the rest of the world, including the United States.
Visiting University of Chicago Beijing Center
After the two-day intensive academic brainstorms, the guests went to the University of Chicago Beijing Center for a visit. Among the participants at the conference, five received Ph.D. degrees from the University of Chicago: Professor Justin Yifu Lin, Professor Yong Wang, Professor Erzo G. J. Luttmer, Professor Weerachart Kilenthong and Professor Alexander Monge-Naranjo.
Under the guidance of Miss Liang at the Beijing Center, the guests visited the center's working and conference facilities, as well as the monumental exhibits. Miss Liang said that the Beijing Center is dedicated to promoting exchanges between the University of Chicago and Chinese universities. It tries to provide a good working and learning environment for the teachers and students who come here from the University of Chicago, making them feel at home. In front of a map of the University of Chicago campus and the photo wall of the University of Chicago's Nobel laureate, the five scholars from the University of Chicago made discussions with great interest, recalling the bit by bit when they were studying at the University of Chicago. The other guests also stopped to watch, listened to the guidance, and feel the cultural and academic atmosphere of the world's top university. Finally, the Beijing Center presented the visiting guests with exquisite souvenirs from the University of Chicago. All the guests took a group photo together.
So far, the two-day 5th NSE International Conference has come to a successful conclusion, and the process of exploring the truth along the way of New Structural Economics is still in progress.
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