Housing Prices Threaten Competitiveness

How Do Chinas Inland-Favoring Land Policies Raise Wages?

Wenquan Liang, Ming Lu, and Hang Zhang
(Shanghai Jiaotong University; Fudan university)

The views expressed in this presentation are the views of the author and do not necessarily reflect the
views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), its
Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data
included in this paper and accepts no responsibility for any consequences of their use. Terminology used
may not necessarily be consistent with ADB official terms.

I. Introduction

Since 2003, wage has risen quicklyZhang, 2011

Cai and Du, 2011)

Two kinds of wage growth

Productivity-based, not bad

If raised by housing price and land price, the

competitiveness of China's economy will be hurt.

After 2003, wage rose quickly

Zhang, 2011, CER

Lewis turning point?

Shortage of labor? Wages will grow fast? Population policy adjustment?

When urbanization around 50%; Urban-rural income ratio > 3

The Lewis turning point of labor supply is assumed to be sharp

Policy turning point

In 2003, land policy changed

Amount: stricter management of the construction land quota

Sale method: listing; bidding; auction

Structure: increasing supply of construction land quota in inland

Question

Did the housing price affect the wages?

Is there any difference of the mechanism

between the east and the inland?

Our answer
1. Housing prices significantly raised wages.
2. The impact mainly happened in east provinces due to
the distortion in land supply, especially after 2003.

The wage-housing price interaction

Wage

Demand
effect

Cost
effect

Housing price

Inland provinces share in land supply

0.5

0.45

0.4

0.35

0.3

0.25
2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Average wage

The wage-housing price interaction

Housing price (commercial housing sales/sales area)

Changes in ratio of housing prices to wages

East vs. Inland

Consequence
Too early industrial upgrading
Excessive capital deepening

Wage

Demand effect

Cost effect

Labor Productivity (skill)

Dangerous!!!
If wage growth> productivity growth

Housing price

A Spatial Equlibrium Model

Based on the frameworks of Roback (1982) and Moretti (2011)
Each city is competitive economy
-a single tradable good of which the price can be standardized to 1 ;

-a single nontradable good, housing, whose price is determined by the

demand and the supply of housing .

The behaviors of workers and firms determine the population,

wage and housing price.

Workers
Each worker is perfect mobile and provide one unit of labor.
Each workers utility depends on nominal wage, cost of living(housing)
The log indirect utility function of worker in the city :

(1)

Where is the log nominal wage, is the log value of housing rents, is the share of
income spent on housing.

Question 1
According to (1), the rise of housing price will cause the increase of
wage to keep the spatial equilibrium where every worker gets the same
utility level across cities.

This is our answer to Question 1

Workers
From(1), we cant know the distribution of workers across cities in the spatial
equilibrium. Therefore we introduce an idiosyncratic preference for locations.
The log indirect utility function of worker in the city :
= +
where is the preference for city , the larger the value means the more favor to city .

Suppose there are two cities: Inland city and Eastern city , then
~[, ]
where characterize the importance of preference for living in city or .

 In the equilibrium, the marginal workers must be indifference between city

and , then we get the following conditions:
=
Then we can know the workers in city and :

= +
= +

where the and are the log workers in city and , = + .

Firms
Production function of firm in the city is

= 1 , + < 1
where is the fixed factor leading to the derived demand for labor slope down.

Suppose the capital is infinitely supply in the given interest rate . Then we get
=
where =

+ ; = ,
+

+ ; = , = , =

So that
=

1
(
1

Housing
Suppose each worker consume one unit of housing. So the demand function of
housing in the city and ,
= +
= +

In our paper, we just assume the supply of housing:

= ; = ,
where the characterize the elasticity of housing supply: the larger the , the smaller the
housing elasticity.

 is exogenously determined by characteristics of city which impact the

availability of land from development for two ways:

-(1) geographic characteristics, which make the land in the city undevelopable, result in
the elasticity become smaller. Such characteristics have variation across cities, but not
across time. (Diamond, 2012; Gyourko et al., 2008; Saiz,2010)
-(2) Land regulation can also have a similar effect by further restricting housing supply
(Diamond, 2012; Gyourko et al., 2008)
In China, since 2003 government has reduced construction land supply in the East cities, thus a
less elastic housing supply.

The effect on the housing price, wage and population caused by land
regulation difference across cities is what we concern in our paper.

Equilibrium
According to (1)-(3), we get that:

=
1
+
+

1
= 1 1
+
+

= 1

= 1

+
where = 1 + 1 1 ; = ,
1
1

Comparative Static Analysis

What if increase?

>

0;

>0

>0

The increase of will lead to the housing price in the city and . By the way,
the increment of housing price in the city is larger than the city .

=
=

+ 2

2
1

1
+ 2
1
1

1 <0
1 >0

The increase of will lead to an increase of wage in the city , but an decrease
in the city .

Question 2
In China, since 2003, government reduce construction land supply in the
East city , which lead to the increase of , then
-raise the housing price in the East city , and lead to the increase of the wage in the
East city ;
-raise the housing price in the Inland city , but lead to the decrease of the wage in the
Inland city ;

This is our answer to the Question 2

Identification
Endogeneity
Housing prices and wages may cause each other

How to identify
-- Instrument variable + Border sample

Identification

Wage

Demand effect

Housing price

Cost effect

X
Border
sample

IV: per capita land supply

in the previous year
Construction land quota

Note: No construction land quota data at the city-level, so we use the land supply instead.

Approve of construction land (from farmland)

Approved construction land (from farmland) and

land supply

Unit: Hectare

Province-level grant land

Note: the part of farmland is mainly controlled by central government; it is exogenous for cites.

Inland share in approved construction land (from

farmland) and land supply

The ratio of land supply per capita:

east vs inland
2.8
2.6
2.4
2.2
2
1.8
1.6
1.4

1.2
1
2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Regression model

Level of economic development :per capita GDP

Investment intensity: fixed-asset investment/GDP
Industrial structure :the ratio of tertiary industry output to
secondary industry output

Employment density: number of staffs from secondary and

tertiary industry/ built-up area

Infrastructure: per capita road area

Education: per capita number of teachers in high school

Transportation: per capita number of buses

Environment: per capita green areas
Medical: per capita hospital bed

DATA

All samples2001-2010 286 prefect-level cities (except Lhasa)

Source

1. City statistical yearbook 2001-2010

2. Land resource statistical yearbook 2000-2010

3. Regional development statistical

yearbook 2001-2010

VARIABLES
Per capita grant land
Ln(Per capita GDP)
Ln(Investment intensity)
Ln(Industry structure)
Ln(Employment density)

First
stage

Ln(Infrastructure)
Ln(Transportation)
Ln(Education)
Ln(Environment)
Ln(Medical)
Constant
Province dummy
Year dummy
Observations
R-squared

First-stage F

(1)

(2)

(3)

All sample
Ln(Housing price)
-0.00499***
(0.000854)
0.318***
(0.0147)
0.0111
(0.0137)
0.205***
(0.0110)
0.0363***
(0.00640)
-0.0214*
(0.0130)
0.130***
(0.0114)
-0.0803***
(0.0264)
-0.0185**
(0.00878)
-0.0760***
(0.0159)
4.156***
(0.245)
Y
Y
2,683
0.807
34.0473

East
Ln(Housing price)
-0.00466***
(0.00117)
0.372***
(0.0237)
-0.0831***
(0.0240)
0.239***
(0.0222)
0.000513
(0.0120)
0.0664***
(0.0226)
0.146***
(0.0188)
-0.0170
(0.0469)
0.0323**
(0.0160)
-0.152***
(0.0297)
4.536***
(0.412)
Y
Y
959
0.840
15.9387

Inland
Ln(Housing price)
-0.00537***
(0.00123)
0.294***
(0.0183)
0.0833***
(0.0162)
0.164***
(0.0127)
0.0552***
(0.00749)
-0.0655***
(0.0153)
0.0896***
(0.0138)
-0.122***
(0.0310)
-0.0294***
(0.0101)
-0.0343*
(0.0184)
4.053***
(0.300)
Y
Y
1,724
0.740
18.9669

VARIABLES
Ln(Housing price)
Ln(Per capita GDP)
Ln(Investment intensity)
Ln(Industry structure)
Ln(Employment density)

2SLS

Ln(Infrastructure)
Ln(Transportation)
Ln(Education)
Ln(Environment)

Ln(Medical)
Constant
Province dummy
Year dummy
Observations
R-squared

(1)
All sample
Lnwage
0.353***
(0.116)
0.129***
(0.0372)
0.0300***
(0.00916)
-0.0452*
(0.0241)
-0.0286***
(0.00630)
-0.0219**
(0.00943)
-0.00351
(0.0170)
0.00898
(0.0205)
0.0135**
(0.00634)
0.0320**
(0.0142)
5.947***
(0.509)
Y
Y
2,683
0.877

(2)
East
Lnwage
0.742***
(0.216)
-0.0432
(0.0800)
0.0775**
(0.0308)
-0.138**
(0.0556)
-0.0482***
(0.0103)
-0.0546**
(0.0226)
-0.0490
(0.0362)
-0.0722*
(0.0406)
0.00458
(0.0151)
0.127***
(0.0421)
4.668***
(1.003)
Y
Y
959
0.790

(3)
Inland
Lnwage
-0.150
(0.165)
0.283***
(0.0488)
0.0529***
(0.0176)
0.0418
(0.0271)
0.00808
(0.0113)
-0.0506***
(0.0165)
0.0455***
(0.0176)
-0.00431
(0.0307)
-0.00546
(0.00878)
-0.0110
(0.0148)
7.982***
(0.698)
Y
Y
1,724
0.867

Why some control variables have wrong coefficients?

(2SLS)

(1)
Lnwage
13.31

(2)
Lnwage
0.346**

(3)
Lnwage
0.0851

(4)
Lnwage
0.353***

(72.95)

(0.192)

Ln(Per capita GDP)

(0.159)
0.155***

(0.116)
0.129***

Ln(Employment density)

-1.874

(0.0400)
-0.0290**

-0.000330

(0.0372)
-0.0286***

Other variables
Province dummy
Year dummy
Observations

(10.65)
N
Y
Y
2,734

(0.0115)
N
Y
Y
2,716

(0.0135)
Y
Y
Y
2,694

(0.00630)
Y
Y
Y
2,683

0.876

0.874

0.877

VARIABLES
Ln(Housing price)

R-squared

Before and after 2003

(1)

(2)

(3)

East

VARIABLES
Ln(Housing price)
Other variables
Province dummy
Year dummy
Observations
R-squared

(4)
Inland

2001-2003

2004-2010

2001-2003

2004-2010

Lnwage

Lnwage

Lnwage

Lnwage

11.28
(87.34)

0.583***
(0.162)

-0.169
(0.742)

-0.118
(0.148)

control

control

control

control

291

668
0.771

497
0.612

1,227
0.796

East
VARIABLES

Ln(Housing price)
Other variables
Province dummy
Year dummy
Observations
R-squared

(1)
(2)
(3)
(4)
(5)
(6)
2001-2002 2003-2004 2002-2003 2004-2005 2003-2004 2005-2006
Lnwage
Lnwage
Lnwage
Lnwage
Lnwage
Lnwage

1.596
(2.687)
control
Y
Y
193

1.067
(0.906)
control
Y
Y
179
0.426

4.724
(12.62)
control
Y
Y
197

0.972*
(0.571)
control
Y
Y
180
0.393

1.067
(0.906)
control
Y
Y
179
0.426

1.513**
(0.694)
control
Y
Y
200

Inland
VARIABLES

Ln(Housing price)
Other variables
Province dummy
Year dummy
Observations
R-squared

(1)
(2)
(3)
(4)
(5)
(6)
2001-2002 2003-2004 2002-2003 2004-2005 2003-2004 2005-2006
Lnwage
Lnwage
Lnwage
Lnwage
Lnwage
Lnwage

-0.108
(0.326)
control
Y
Y
322
0.607

0.108
(0.311)
control
Y
Y
345
0.599

-0.486
(2.875)
control
Y
Y
343
0.253

0.200
(0.304)
control
Y
Y
348
0.516

0.108
(0.311)
control
Y
Y
345
0.599

-0.00919
(0.334)
control
Y
Y
357
0.569

Close to the border

Close to the boundary

t=1.2

VARIABLES
Ln(Housing price)
Other variables
Province dummy
Year dummy
Observations
R-squared

(1)
(2)
(3)
(4)
(5)
(6)
2001-2010
2001-2003
2004-2010
Right
Left
Right
Left
Right
Left
Lnwage Lnwage Lnwage Lnwage Lnwage Lnwage
0.706
4.482
1.279
0.252
0.545
6.140
(0.552) (10.26) (1.643) (0.255) (0.417) (14.36)
control control control control control
control
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
366
326
111
99
255
227
0.856
0.405
0.689
0.837

Close to the border

Liaoning
Hebei=east

Daxinganling

Heihe
Hulunbier

Yichun

Hegang

Tacheng

Aletai

Qiqihaer

Jiamusi

Boertala

Shuangyashan

Suihua
Karamay

Qitaihe
Xingan

Daqing

Yili

Haerbin
Changji
Baicheng
Songyuan
Changchun

Urumqi

Mudanjiang

Jilin
Kezilesu

Tongliao
Turpan

Hami

Yanbian

Siping

Xilinguole

Akesu

Liaoyuan
Chifeng

Tieling

Baishan
Tonghua

Fuxin
Shenyang Fushun

Kashgar

Baotou
Bayinguole

Wulanchabu

Chaoyang

Bayanzhuoer

Chengde

Jiuquan

Zhangjiakou

Huludao

Jinzhou
Liaoyang Benxi
Panjin
Anshan Dandong
Yingkou

Alashan
Hotan

Huhehaote

Qinhuangdao
Beijing

Datong
Shuozhou

Eerduosi

Dalian
Tangshan
Tianjin

Wuhai
Baoding
Shizuishan

Langfang

Xinzhou
Cangzhou

Haixi

Yinchuan

Yangquan
Shijiazhuang

Haibei

Taiyuan

Hengshui

Binzhou
Dongying

Yulin
Zhongwei Wuzhong

Lvliang

Jinzhong

Xingtai

Yantai

Weihai

Dezhou
Qingdao

Xining

Handan
Haidong

Changzhi

Hainan

Yanan

Liaocheng

Linfen

Anyang

Jinan Zibo
Laiwu
Taian

Weifang

Guyuan

Rizhao

Ali

Jincheng

Hebi Puyang

Jining

Huangnan
Yushu
Naqu

Tongchuan
Xianyang Weinan

Guoluo

Jiyuan JiaozuoXinxiang
Heze
Zhengzhou
Sanmenxia
Kaifeng Shangqiu
Luoyang
Xuchang

Baoji

Lianyungang
Xuzhou
Suqian
Suzhou
Huaibei
Yancheng
Pingdingshan Luohe Zhoukou Bozhou
Huaian
Bengbu
yangz
Fuyang
hou
Nanyang
Huainan
Zhumadian
Chuzhou
TaizhouNantong
Zhenjiang
Hefei
Nanjing
liuan
Xiangfan
Xinyang
Changzhou Suzhou
Wuxi
Suizhou
ChaohuMaanshan
Shanghai

Xian
Wudu

Shangluo
Hanzhong

Aba

Ankang

Shiyan

Guangyuan
Mianyang
Bazhong
Changdu
Rikeze

Lasa

Linyi
Zaozhuang

Yuncheng

Shennongjia
Ganzi

Deyang

Nanchong Dazhou

Jingmen Xiaogan
Huanggang
Yichang QianjiangTianmen Wuhan ezhou
Xiantao
Jingzhou
XianningHuangshi

Chengdu
Linzhi

Meishan

Shannan

Suining Guangan
Ziyang

Yaan

Enshi

Leshan

Neijiang
Zigong

Chongqing

Jingdezhen

Zhangjiajie

Yibin Luzhou

Jiujiang
Changde
Yiyang

Xiangsi

Diqing

Yueyang

Jinhua
Quzhou
Taizhou
Shangrao
Lishui
Yingtan
Wenzhou

Nanchang
Yichun

Liangshan

Changsha
Zunyi

Tongren

Xinyu

Shaotong

Loudi

Xiangtan

Huaihua
Lijiang

Wuhu
Tongling
Huzhou Jiaxing
Anqing
Xuancheng
Chizhou
Hangzhou
Ningbo
Huangshan
Shaoxing

Panzhihua

Nujiang

Guiyang

Fuzhou

Pingxiang
Jian
Hengyang Zhuzhou

Bijie
Shaoyang

Nanping

Qiandongnan
Dali

Chuxiong

Kunming

Fuzhou

Qiannan

Baoshan

Chenzhou

Qianxinan

Ganzhou

Yongzhou

Dehong
Hechi

Putian
Longyan

Guilin
Yuxi

Hezhou

Xiamen

Qingyuan

Meizhou
Heyuan

Wenshan

Zhangzhou
Chaozhou

Laibin
Honghe

Baise

Wuzhou

Guangzhou
Jieyang
Shantou
Huizhou
Nanning
Yunfu
Fuoshan Dongwan
Shanwei
Chongzuo
Yulin
zhongshan Shenzhen
Xianggang
Fangchenggang Qinzhou
Jiangmen
Aomen
Beihai
MaomingYangjiang
Zhuhai
Guigang

Xishangbanna

Quanzhou

Shaoguan

Liuzhou

Lincang

Puer

Ningde

Sanming

Liupanshui
Qujing
Anshun

Zhanjiang

Haikou
Hainan

Sanya

Zhaoqing

Taiwan

Zhoushan

Jixi

The share of land supply on the

right side of the boundary
2001-2003

2004-2010

0.791

0.729

1.824

East (except
for LN, and
HB)

0.613

0.535

1.677

LN & HB

0.178

0.194

-0.892

East (right)

Border samples

VARIABLES

Ln(Housing price)
Other variables
Province dummy
Year dummy
Observations
R-squared

(1)
(2)
2001-2010
Right
Left
Lnwage Lnwage
0.601*
1.452
(0.340) (4.838)
control control
Y
Y
Y
Y
237
219
0.878
0.635

(3)
(4)
2001-2003
Right
Left
Lnwage Lnwage
1.106
0.140
(1.038) (0.209)
control control
Y
Y
Y
Y
72
68
0.521
0.748

(5)
(6)
2004-2010
Right
Left
Lnwage Lnwage
0.396*
-6.147
(0.236) (44.68)
control control
Y
Y
Y
Y
165
151
0.874

Other factors?
1.Did the east experience faster growth in per capita GDP
1.8

1.7

1.6

1.5

1.4

1.3

1.2
2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

The ratio of secondary and tertiary industries output in east to that in inland

Other factors?
2. Did east experience faster growth in minimum wage?
The trend of minimum wage
900
800
700
600
500
400
300
200
100

0
2001

2002

2003

2004

2005

Eastern cities

2006

2007

Inland cities

2008

2009

2010

East-inland ratio of average minimum wage

1.35

1.3

1.25

1.2

1.15

1.1

1.05
2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

VARIABLES
Ln(Housing price)
Ln(minimum wage)
Other variables
Province dummy
Year dummy
Observations
R-squared

(1)

(2)

(3)

All sample

East

Inland

Lnwage

Lnwage

Lnwage

0.357***
(0.113)
0.0461
(0.0428)
control
Y
Y
2,681
0.882

0.732***
(0.206)
-0.265*
(0.148)
control
Y
Y
960
0.843

-0.130
(0.162)
0.108***
(0.0347)
control
Y
Y
1,721
0.865

Robustness checks
Change IV to per capita land supply in current year

IVper capita land supply in current year

VARIABLES
Ln(Housing price)

Other variables
Province dummy
Year dummy
Observations
R-squared

(1)
All sample
Lnwage
0.160**
(0.0736)
control
Y
Y
2,693
0.894
(1)

VARIABLES
Ln(Housing price)
Other variables
Province dummy
Year dummy
Observations
R-squared

(2)
East
Lnwage
0.522***
(0.138)
control
Y
Y
962
0.854
(2)

2001-2003
East
Inland
Lnwage
Lnwage
3.039
-0.219
(10.98)
(0.849)
control
control
Y
Y
Y
Y
294
503
0.583

(3)
Inland
Lnwage
-0.157
(0.119)
control
Y
Y
1,731
0.868
(3)

(4)

2004-2010
East
Inland
Lnwage
Lnwage
0.628***
-0.138
(0.150)
(0.113)
control
control
Y
Y
Y
Y
668
1,228
0.752
0.793

Robustness Check -2
Another instrument variable
IVland supply/ urban (district) area

IV land supply/ urban (district) area

VARIABLES
Ln(Housing price)
Other variables
Province dummy
Year dummy
Observations
R-squared

(1)
All sample
Lnwage
0.380**
(0.156)
control
Y
Y
2,682
0.873
(1)

VARIABLES
Ln(Housing price)
Other variables
Province dummy
Year dummy
Observations
R-squared

(2)
East
Lnwage
0.230*
(0.130)
control
Y
Y
959
0.903
(2)

2001-2003
East
Inland
Lnwage
Lnwage
8.096
0.0159
(152.3)
(0.329)
control
control
Y
Y
Y
Y
291
497
0.677

(3)
Inland
Lnwage
-0.0393
(0.470)
control
Y
Y
1,723
0.878
(3)

(4)

2004-2010
East
Inland
Lnwage
Lnwage
0.288**
0.114
(0.131)
(0.220)
control
control
Y
Y
Y
Y
668
1,226
0.856
0.813

Conclusion
1Housing prices significantly pushed up wages
2After 2003, the misallocation of land supply to the inland
raised the housing price in the East, then drove wages up.

Policy implications
The allocation of land supply should match with the flow of
population
Allow the transaction of construction land quota among regions

Thanks!
Comments welcome