Institute for Research on Labor and Employment

This paper uses a unique panel dataset from China's initial reform of fiscal decentralization to analyze the relationships between fiscal decentralization, local economic development, and rural-rural undocumented inter-provincial labor mobility. Using a modified gravity model with Heckman Maximum Likelihood Estimation method, this paper shows that fiscal decentralization has two contending effects on labor market integration: Local economic development promotes labor mobility at the labor migration destination, but local public goods crowding restrains the inflow of labor. This paper also demonstrates that the crowding effect is stronger at lower levels of government.