The Role of Informal Housing in Lowering China’s Urbanization Costs

Over the past 30 years, China has experienced unprecedented economic growth spurred by large-scale rural-urban migration, industrialization, and strong global demand for its cheaply produced goods. This paper argues that an abundant supply of informal housing helped accommodate huge migrant inflows, and contain labor costs. By constructing a unique proxy for city-level informal housing supply elasticity, we examine the linkages between urban housing markets and labor markets (migration flows and wages), with a focus on the low-skilled migrants who are most likely to live in informal housing. We find greater migration inflows in cities with more elastic housing supplies, in both informal and formal sectors. We show that informal housing supply elasticity matters more for low-skilled migrants (those with a high school education or less), and that formal housing supply conditions matter more for high-skilled migrants (those who have a college degree or more education). Cities with greater elastic housing supplies have lower wage levels and faster economic growth. The findings provide a better understanding of the important role the informal housing sector has played in facilitating the low-cost urbanization and industrialization of China.