Abstract: In developed countries, aggregate employment is strongly pro-cyclical and almost as volatile as output. In China, the correlation of aggregate employment and output is close to zero, and the volatility of aggregate employment is very low. We argue that the key to understanding the aggregate employment fluctuations in China is the labour reallocation between the agricultural and non-agricultural sectors, and that income effect plays an important role in determining the labour reallocation dynamics in both the long-run and short-run.
Keywords: Structural Change, Income Effect, Labour Reallocation, Employment Fluctuations, China
JEL Classification: E24, E32, O41