In this paper, we analyze labor supply in urban China using discretized neo-classical labor supply
model, where we take into account the unobserved heterogeneity, unobservability and measurement
errors of the wage rates, and the correlation of the wage and preferences. Elasticities of labor supply
are calculated. We also simulate the effect of tax policy on the labor supply. The elasticities are
found to be quite small, in accordance with the fact that China in general is a labor abundant country.