Social Sciences in China (Chinese Edition)

No.5, 2015

How the Bias toward Central/Western Land Supplies Boosts Wages in the East

(Abstract)

Lu Ming, Zhang Hang and Liang Wenquan

Aiming at the rapid increase in labor costs in the Chinese economy and using panel data for 286 prefectural-level cities from 2001 to 2010, we made land supply the instrumental variable in housing prices and compared boundary samples for the eastern and the central and western provinces. After effectively controlling for possible model estimation error arising from endogeneity, we examined housing prices as a driver of wage growth. Our findings show that when, from 2003, the government started to implement a land supply policy biased towards the central and western regions, with a corresponding reduction in land supply in the east, the result was a rapid increase in housing prices that led to a rise in wages in the eastern region. This effect was not significant in the central and western regions or in the pre-2003 eastern region. This reflects the fact that ignoring the key role of geographical factors and using administrative measures to intervene in regional land supply may have a negative effect on economic efficiency and competitiveness.