Trends in income inequality in China: the effects of various sources of income

Abstract

Using data from the China Statistical Yearbook, trends in income inequality for urban and rural China are studied. According to our estimates, the overall Gini for China increased from 1980/81 to 2008. The rural Gini increased at an exponential rate of 1.2% while the urban Gini rose at a rate of 2.7%. To overcome weaknesses in the existing Gini decomposition methodology, we use the method developed by Podder and Mukhopadhaya (2002. The Changing Pattern of Sources of Income and Its Impact on Inequality: The Method and Its Application to Australia, 1975–94. Economic Record 77 (238): 242–51). In rural China, the results show that household operations are the major component of rural disposable income, while the share of wage income is also high. Income from household operations is inequality reducing, as is the case with transfers. The dominant contributors to inequality are wages and property income. Arguably, the optimal way to reduce inequality is policy-induced increases in transfers and the household operations that help the poor. In the urban sector, wage and salary income have the maximum share in total disposable income. The results show that further increases in the wage share in urban sector will increase total inequality in China.

Keywords:

• income inequality
• Gini
• factor component decomposition
• China

Acknowledgement

An earlier version of this paper was presented in the First Annual Workshop on Economic Policy Development at East Asia, jointly organised by the Economic Growth Centre of NTU (Singapore) and the Globalisation and Development Centre of Bond University (Australia) on October 13–14, 2011 at Bond University. The author acknowledges the comments received from the participants of the workshop and from an anonymous referee of this journal. The author is grateful to Noel Gaston for his detailed comments on the draft version of the paper.

Notes

1. When total incomes are arranged in ascending order, a plot of the cumulative proportion of income against the cumulative proportion of the income earners gives the Lorenz curve of total income.

2. Gini can be written as: where Cov(i,x_i ) is the covariance of income with its rank:

3. Unlike the Gini, which lies between (0, 1).

4. Like other developing countries Chinese people in the rural sector are mainly engaged in primary sector activities and in the urban sector secondary and tertiary activities are predominant. A recent phenomenon is the development of hybrid (neither predominantly rural nor urban) provinces, however, available data do not allow any classification of this nature.

5. Meng et al. (2005) using a cross-sectional household survey data from 1986 to 2000 show that urban consumption poverty (and thus urban inequality) increased in the 1990s from increasing income inequality as the price of education, housing and health care (which were previously provided free or at a highly subsidised prices by the state) increased after economic reforms were implemented.

6. For further details on studies explaining Chinese inequality see Mukhopadhaya et al. (2011).

7. Note that this data-set is not available easily, thus we have used a different data source.

8. 2003 is the latest year for which estimates are available from Shi and Luo (2010).

9. Specifically, types of rural (mainly agricultural) production in which the holdings of several farmers are run as a joint enterprise.

10. ‘Others’ represents the residual of all other incomes not classified elsewhere.

11. Kanbur and Zhang (2005) found that while in Chinese illiteracy rate had declined steadily between 1981 and 2000, there are large rural–urban and male–female gaps – the rural illiteracy rate was more than double the urban rate, and female illiteracy was more than double the male rate.