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Abstract Accelerating the reform of household registration system and pushing forward the citizenization will undoubtedly enhance fairness and promote the integration of urban and rural labor market. It is also considered as a key approach to reduce the income gap between urban and rural residents by increasing farmers' income and to stimulate domestic consumption. For those who previously were not but later become citizens， citizenization not only entitles them to access the public services and other social welfare， but also increases their income by raising their reservation wage and strengthening their bargaining power， both of which will enhance their consumption. Whether citizenization would eventually reduce the income gap and stimulate domestic consumption， however， depends on its external effects on the other two groups whose status remain unchanged， namely， the original citizens and non-citizens who have failed to share the pie. This paper is one of the first empirical studies on citizenization's externality． We first define the concept and subject of citizenization before conducting the regression. Based on the existing literature and public policy discourse， ″citizens″ is defined as residents who are entitled to access urban public services and ″citizenization″ as the process through which non-citizens gradually gain the rights to enjoy the urban public services as citizens. As a result of citizenization， the proportion of citizens in a region will increase. In this paper， the proportion of citizens in a region is called ″regional citizenization rate.″ When it comes to the subject of citizenization， two opinions occur: some scholars insist migrant workers in the cities should be the subject， while others hold the view that the subject should be the whole non-citizen group， with migrant workers included. We argue that a consensus that the subject of citizenization should be the whole non-citizen group could be easily reached if we shift the focus from the debate over changing farmers' or migrants' hukou status to stripping away the subsidiary functions from the household registration system. Hence， the denominator should be ″the total permanent residents in the region″ rather than ″the permanent residents living in cities and towns″ when calculating the ″regional citizenization rate.″ We calculate regional citizenization rate using the micro data of 2005 national 1% population sample survey and then investigate the causal relationship between regional citizenization rate and individual labor income. Two different indicators， the proportion of non-agricultural population in the total permanent residents and the average coverage of pension， unemployment and medical insurance， are applied to measure the regional citizenization rate. The results by the two indicators are roughly consistent， both demonstrating significant positive external effects. The marginal external effect of regional citizenization rate， measured by the average coverage of pension， unemployment and medical insurance， on individual labor income using 2SLS with an instrument variable is 0.374. Specifically， the marginal external effect for non-citizens is 0.251， while that for original citizens is much larger， 0.550. It implies that with other conditions unchanged， every 10 percent increase in regional citizenization rate would increase individual labor income by 3.8 percent on average， with 2.5 percent for non-citizens and 5.7 percent for original citizens， respectively. We then relax the assumption that the instrument variable is completely exogenous and re-estimate the external effect with the UCI Method developed by Conley et al. The results show that the external effect is robust． The results indicate ″beggaring thy neighbor″ is not the case. On the contrary， both original citizens and non-citizens who have failed to share the pie will benefit from citizenization. Therefore， the government should guide the public perception properly to eliminate unnecessary fear and barriers for citizenization， and promote the advancement of the citizenization. The results also show that citizenization should be a new engine of China's consumption and economic growth in the future， which the government should not ignore．
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