Highway Construction, Labor Reallocation, and Welfare Gains Under Migration Frictions

ABSTRACT This paper studies the implications of the extent of labor reallocation for the welfare impacts of spatial policies. Migration frictions lead to imperfect spatial arbitrage in individual well‐being, making the impacts of spatial policies dependent on the extent of labor reallocation. We quantify the welfare gains from highway construction in China between 2000 and 2013 under limited labor reallocation with unbalanced labor flows, and compare them to the gains under flexible labor reallocation, where labor flows balance in each city. We show that flexible reallocation amplifies the welfare gains by 19%, with the reduced migration frictions contributing more to the overall welfare gain. It also weakens the welfare distributional effects of highways by reversing migration flows between small and large cities.