Labor Allocation Effect on China's Economic Growth

Since the reform and opening up in 1978, the improving efficiency of resource allocation, particularly the flow and migration of agricultural workforce to non-agricultural sectors, has contributed greatly to China’s economic growth. However, scholars have seldom carried out continuous empirical study on the extent of such contribution mainly due to limited methods for the calculation of labor allocation effect. This paper employs the incremental analysis method of index to separate labor allocation effect from economic growth in order to conduct an analysis on such effect under the framework of economic growth. Using this approach, this paper has calculated the labor allocation effect during various periods of time in China between 1978 and 2014 and the results indicate that the flow and migration of labor constituted the major source of China’s economic growth during the periods between 1978 and 1987, between 1992 and 1998 and between 2003 and 2014 and still have great potentials in the coming decade. After 2025, the labor allocation effect will diminish and is likely to become a factor that hinders economic growth.