Internal migrants account for 10.8% of the world population today and are expected to cause substantial distributional effects between themselves and native residents in rapidly urbanizing countries. In this paper, we study how a significant relaxation of internal-migration restrictions affects labor market outcomes of both incumbent migrants and natives, exploiting the 2014 Hukou reform in China. This reform substantially removed the migration barriers of cities with an urban population below 5 million (non-megacities) but kept the migration barriers in megacities unchanged. Using a difference-in-differences method, we find migrants’ wages in non-megacities experienced approximately a 2.6%–7.9% decline relative to that in megacities after the policy shock. The negative effects were stronger among less educated incumbent migrants. By contrast, the policy change had non-negative impacts on the wages and labor market participation rates of the natives in non-megacities. These results suggest the downward wage pressure imposed by an inflow of migrants falls primarily on incumbent migrants rather than on natives.
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