Economic transition and private-sector labor demand

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This paper studies the policy determinants of economic transition and estimates the demand for labor in the infant private sector in urban China. We show that a reform that untied access to housing in urban areas from working for the state sector accounts for more than a quarter of the overall increase in labor supply to the private sector during 1986-2005. Using the reform to instrument for private-sector labor supply, we find that private-sector labor demand is very elastic. We provide suggestive evidence that the reform equalized wages across sectors and reduced private-sector rents.