Urbanization, Human Capital Accumulation And Growth

Since the reform and opening-up policy, the development of China's economy which is closely related with rapid urbanization has achieved marked results. With the expansion of the urban industry, the agglomeration of urban economy and the rising of the urban income level, even the life style of the cities, the cities act as giant magnets which lure thousands of millions of rural labors out of their home to work in the strange cities. Hence, labors start transfers from rural areas to the cities, which is the most important factor of production. From the view of individual dynamics, the income difference between urban industrial sector and agriculture sector is the main motivation. The Economists used to making a lot of research on the rural-urban migration. The ideal economic model hopes the migration of labor could make the income difference between city and country getting smaller and finally reach an equal level. Currently, China is going through such urbanization process that will not only bring the transformation of society and economic structure but also the enormous numbers of rural-urban migrants and the widening disparities between rural areas and cities. Urbanization has started for more than ten year, and it will go on. When we looking back at the history and facing the reality we start to think whether the urbanization of China could reach our goal. If could not, what will be the final result for China urbanization. This paper will discuss about the urbanization of China will achieve what kind of balance and steady state. We still make Empirical Analysis on your model to see whether it fits better with the truth in China.Lots of empirical research shows economists believe the motivation of the rural-urban migration is'push force'or'pull force'or both. The heart of the matter is the huge income gap between city and country. From some economists views, urbanization will achieve when the income difference getting smaller until reach equal level. But lots of western empirical research shows such income difference didn't reduced by the rural-urban migration. Base on this, economists try to explain why the income difference still exists in the balance model, which means labors do not have the motivation for migration although the income disparity still exists. Why?Todaro explained this by using the concept of expected income to build up the classic rural-urban migration model. In his model, labors know the real income in the rural area and the expected income in the urban area. High urban income is associated with massive unemployment. And the greater the income disparity lies, the more unemployment there is in the cities. It means that the migration face with both high income and the risky of unemployment. The expected income in urban area is the product of the real income in urban area and employment rate. When real income in rural area is equal to expected income in urban area, the migration stops and it reaches point of equilibrium.Obviously, the balance of Todaro model is not our expected result. If we could not explain the truth of the China, what micro foundation should we base on to build our model?Since the complicated aspects of the migration from countries to cities, to simplify our model, and to have a better explanation, we found our model on the individual or family decisions. We would investigate how their micro decisions would induce the result of the urbanization and whether fit our truth in China.We divide micro decisions into three levels:the first is migration decision. In our model, migration is to maximize their income. It means that the income disparity is the key to make migration decision. The individual or family makes migration decision in term of the income disparity between rural and urban area. The second is the decision of consuming and saving. In the classic models, the rural-urban migration is just the consequence of industrialization. Actually, migration labors play an important role in the development of industrialization. Their consumption and saving choice determine the path of capital accumulation and finally promote economic growth. Therefore, the consumption and saving choice of migration labors is also the reason developing urban industry sector. In this way, our model builds a two-way system which connects rural-urban migration with the development of urban industry sector. The third, we talk about the decision of human capital investment. We know, human capital investment, especially education is to improve the quality of the labor and their efficiency. In the complete competition, the improvement of labor efficiency means high labor income. We assume the human capital is only work in the city. Therefore, the decision of the human capital shapes the income disparity of the rural and the urban area. It means that more labor have chances to move into the city. The thesis builds the model based on the three decisions above.We firstly introduce the heterogeneity of the labor and construct the model. We assume that different labors own different cost of migration and build an upwards labor supply curve faced the citizen labor market. It is the heterogeneity that makes the fact that the migration would reach the equilibrium even there still lie income disparity of the rural and the urban area. We could discuss how different institution which hinders rural-urban migration makes labor supply curve move to right. It would reach to the point of equilibrium with big rural-urban income gap.Since the model doesn't include urban economic growth, in this sense, it is a static model. Next, we add another decision which is consuming and saving into our model. At the beginning of each period, labors in rural areas make the decision whether to migrate to urban area or not. And after their migration, labors need consider the tradeoff of the consuming and saving. Accounting for the trade off, the micro decision would shape the dynamic path of the capital accumulation. With the accumulation of the city capital, the capital labor ratio rises and the city wage rises which induce more labors into the city. In this circle, urbanization becomes part of the development of the urban industry. In this dynamic model, we build a two-way connection between rural-urban migration and the development of urban sector and explain the cause of growing income gap between rural and urban area.In the end, when the capital accumulation reach the point the equilibrium, the income gap is no longer widening, the rural-urban migration is completed. In this dynamic, it reaches the dynamic equilibrium under the income gap. Finally we introduce the decision of human capital investment. The important feature of the urban economy is the transformation of the pattern of economic growth to the 21st century. Including human capital decision in the model, we integrate migration process with the change of model of economy. We talk about the process of the physical and human capital accumulation which promotes the process of the urbanization and rises per capital and urban industry wage. With the increase of the human capital and productivity of labor in urban area, it keep draws labors in rural areas until it reach the point of equilibrium. At the point of equilibrium, the urbanization is finished and the urban economy goes into steady state. In our model we try to put the urbanization and industry economy development together and describe their dynamic relationship. We know it is complicated, especially in present China in which there lies the isolated labor market and incomplete financial market. We just try to investigate the essential part of the steady state of the urbanization and find a possible path of economy development.