We examine the impact of China’s hukou system, which is an institution controlling population
movement, on social and economic outcomes at the individual level. Using data from a recent
Chinese household survey, we find that people who obtained urban hukou late in their lives fared
significantly less well than other urban residents. They have fewer years of education, are less likely
to hold state sector jobs and to have employer-provided healthcare benefits, and are more likely
to be self-employed or unemployed. A rural–urban comparison that controls for factors commonly
believed to affect migration decision reveals that the two major contributing factors to rural–urban
inequality are low educational attainment among rural population and low rewards to education in
rural employment. Since the hukou system denies rural population the access to education and urban
employment, we argue that the hukou system is a major contributing factor to rural–urban inequality.
We also estimate the value of an urban hukou to rural individuals.