| Individuals’ welfare should be the aim of urbanization. There are debates in China about whether big cities or small cities should be given priority to develop. Theoretically, the optimal pattern of city development is a trade-off between agglomeration effects and congestion effects. However, lacking a clear understanding of agglomeration and its economic benefits, contemporary policies in China tend to restrict the growth of big cities. As a result, about 51%-62% of Chinese cities are under-sized, leading to great efficiency losses. (Au and Henderson,2006) Studies in new economic geography and labor economics confirm that agglomeration raises productivity through various ways. (Duranton and Puga,2004) However, for economic growth to be inclusive, income and employment growth are essential. Actually, there are always concerns that with the growth of city population, competition might be more intensive in the urban labor market, driving down one’s income and jeopardizing one’s employment. Is it really the truth? This paper investigates the influence of economic agglomeration on urban labor market, and finds that city growth promotes one’s income and employment. Besides, economic agglomeration enhances the growth of the service sector as well. Our findings suggest that policies restricting city growth at the early stage of urbanization are inefficient and harmful in the sense of people’s income and employment, and they may jeopardize the structural transformation of the Chinese economy.Based on a theoretical model about economic agglomeration and individual income, we estimate the effect of city scale on income using individual-level data from the 2002 and 2007 Chinese Household Income Project Surveys. We use the historical population growth during China’s planned economy as the instrumental variable (Ⅳ) of current population size. IV estimates show that individual incomes are higher in larger cities. Every one percentage increase in city population leads to approximately 0.189%-0.190% increase in one’s nominal income. Even when cities’ price differences are considered, city growth still raises individual incomes. We use two different price indices to deflate nominal income, and find that when city population grows by 1%, individuals’real incomes rise by 0.083% to 0.143%. Besides, our results show that the effects of city growth on income are heterogeneous across individuals with different income levels. Though every one benefits from city growth, those with the lowest income levels benefit the least.Based on the analyses on agglomeration and income, we further investigate whether city population growth enhances employment. Probit models of employment determination are estimated. Ⅳ results show that it is more likely for individuals to gain employment in big cities. A one percent increase in city scale raises one’s employment probability by between 0.017 and 0.023 percentage points. Moreover, the scale advantage of big cities is heterogeneous among individuals with different levels of human capital, with the least-skilled workers benefiting the most. On average, a one percent increase in the city’s population increases the employment probabilities of the least-skilled individuals by 0.028-0.038 percentage points. However, the marginal effects for the medium-skilled and highest-skilled individuals decrease to 0.016-0.023 and 0.011-0.015 percentage points, respectively. By comparing the results of city growth on income and employment, we find that individuals at all skill levels and income levels benefit. Therefore, to realize inclusive economic growth, we should loosen restrctions on labor migration and encourage population agglomeration.Apart from evidence of agglomeration effects on urban labor market from individual level, we investigate city level job creation effects of agglomeration as well. Development of the service sector is essential for structural transformation and job creation in the post-industrialization era. Therefore, we focus on the employment multiplier effect of manufacturing jobs on service jobs. Using city level employment data from China in 2003-2009, the multiplier effect of manufacturing employment on local service employment is investigated. Regression results from IV estimations of fixed-effect models show that manufacturing employments have significantly positive influences on local service employments. Every one percent increase in manufacturing jobs increases the city’s service jobs by 0.397%. The multiplier effect is the largest for consumer services. Besides, we find that employment multiplier effect is influenced by urbanization and city scale. Manufacturing employments only increase service jobs in cities with higher urbanization levels or larger city scales. In those less urbanized or smaller cities, however, manufacturing employments actually decreases service employments due to crowding out effects. Our results suggest that adjustments should be made concerning city development. To accelerate structural transformation of the macro-economy and the growth of the sevice sector, labor agglomeration into cities, especially those big cities, should be encouraged.
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