This dissertation examines the central features of the current Chinese labor market, investigates the functioning of China's labor market by constructing a theoretical model, and conducts a comprehensive welfare economic analysis using the model to study welfare consequences of various labor market policies. The dissertation consists of six chapters. Following the introduction of Chapter 1, Chapter 2 reviews key features of the current Chinese labor market based on previous literature, including labor market segmentation, household registration system, wage evolution, employment structure, etc. However, previous studies have not provided a satisfactory answer about the extent of hukou-based labor market discrimination in firms with different ownerships. Chapter 3 fills in this gap by providing more convincing empirical evidence on this particular feature using a double-selectivity approach. The results show that state-owned enterprises (SOE) are much more discriminatory than private firms against rural-to-urban migrants who carry their rural hukou to cities. The SOE sector practices both wage and hiring discrimination against rural hukou holders. Based on these empirical results, Chapter 4 constructs a theoretical model for the current Chinese labor market. The model has two geographically distinct areas (urban and rural), three segmented economic sectors (SOE, private, and agriculture), and two types of workers distinguished by the hukou status (urban and rural hukou). The paper first formulates the model and obtains a closed form solution before modeling any policy interventions. Chapter 5 then works out the labor market and welfare consequences of three policy interventions which include promoting rural development, reducing the cost-of-living in urban areas for rural hukou holders, and offering some rural workers the chance to convert from rural to urban hukou status. The policy analysis includes small increases in each of these three areas, followed by the allocation of a specified development budget among these three alternative uses. It is shown that the rural development policy is unambiguously welfare-improving, while the other two policies have ambiguous effects on social welfare. Chapter 6 concludes.