Inequality of opportunity and income inequality in nine Chinese provinces, 1989–2006

While there is a large and growing body of research describing and analyzing changes in the Chinese income distribution, researchers have paid considerable less attention to inequality of opportunity. The aim of this paper is to contribute to filling this gap in the literature. The two main questions addressed empirically for the first time in a Chinese context are: to what extent are individuals’ incomes and individual income differences due to factors beyond the individual's control (in Roemer's terminology “circumstances”) and to what extent are they due to outcomes of the individual's own choices (“effort”). What is the relationship between income inequality and inequality of opportunity?For this purpose we use data from the China Health and Nutrition Survey collected from nine provinces during the period 1989 to 2006. The CHNS has detailed information about incomes and other factors enabling us to construct a host of circumstance and effort variables for the offspring.We find that China has a substantial degree of inequality of opportunity. Parental income and parents' type of employer explain about two thirds of the total inequality of opportunity. Notably, parental education plays only a minor role implying that parental connections remain important. The results show that the increase in income inequality during the period under study largely mirrors the increase in inequality of opportunity. Thus, increased income inequality does not reflect changes in effort variables, or expressed differently, increased income inequality has not been accompanied by a decrease in inequality of opportunity.     

The distribution of income: Evidence,theories and policy

Summary This Tinbergen Lecture begins by reviewing empirical evidence about trends in income inequality in a number of Western countries. There is considerable diversity of experience across countries. The first quarter century after the Second World War was not generally characterised by a steady downward trend in inequality, but by episodes of inequality reduction at different dates. More recently, several OECD countries have seen a rise in inequality, but the rates of increase differed and in around half of the countries shown there was no significant upward trend over the 1980s. The differing experiences, and the episodic nature of changes, have implications for the explanations of inequality considered in Sections 2 and 3 of the Lecture. I begin with the mechanism which Tinbergen described in Chapter 6 of hisIncome Distribution: the race between technological development and education. It is argued that behind the supply and demand model there lie a variety of factors, and that the explanation we give may be important in determining whether what we are observing are wagedifferentials or wageinequality. Moreover, we need to consider non-labour income, and Section 3 examines the determination of state transfers and of capital income. Finally, in Section 4, I consider some of the policy implications, focusing on one particular set of policy proposals in which Jan Tinbergen was interested: the idea of a basic income.Ninth Tinbergen Lecture delivered on September 29, 1995 at De Nederlandsche Bank, Amsterdam for the Royal Netherlands Economic Association.     

Intergenerational income mobility and economic freedom

Numerous studies have found that income inequality reduces the chances of upward relative mobility (i.e., climbing up the income ladder). However, most of this work ignores the role played by institutional quality (namely, economic freedom) in determining mobility and increasing the individual's set of choices. We fill this gap by empirically testing the direct and indirect (through economic growth) impacts of economic freedom on intergenerational income mobility. We find that economic freedom has both direct and indirect effects on intergenerational income mobility, while income inequality is a strong predictor of downward income mobility. When we incorporate findings about the purely mechanical relationship between inequality and intergeneration income mobility, we find that the legal system and property rights component of economic freedom matters more than inequality. These results suggest that good institutions can increase intergenerational income mobility.     

Top incomes in China: Data collection and the impact on income inequality

Using data on top incomes collected from different sources, we combine the samples of top incomes with a household survey (HS) to investigate changes in income distribution with and without top incomes. The Gini coefficient of income inequality using HS data is 0.464 for 2016 and jumps to 0.646 after including the samples of top incomes, which demonstrates the importance of top incomes in estimating income inequality.     

Decomposing income inequality in a backward pre‐industrial economy: Old Castile (Spain) in the middle of the eighteenth century

Research on economic inequality in early modern Europe is complicated by the lack of appropriate data for reconstructing income or wealth distributions. This article presents a study of income inequality in mid‐eighteenth‐century Old Castile (Spain) using the Ensenada Cadastre, a census conducted between 1749 and 1759. The article describes the information provided by this census and then discusses its advantages and disadvantages for reconstructing income profiles and calculating income inequality. This is followed by analysis of a dataset derived from the Cadastre that consists of more than 4,000 observations from Palencia (a province in northern Spain) and contains information on sources of household income, each household head's main occupation, residence location, and other household characteristics. Demographic data from this census is used to weight observations in the sample and thereby minimize selection bias. Findings show that inequality in eighteenth‐century Spain was probably substantial despite its relative backwardness; that the relationship between inequality and per capita income was not clear‐cut and was probably influenced by measurement of the higher incomes; and that although income inequality was largely driven by uneven land distribution, labour income also contributed to overall inequality—especially in urban centres.     

Introduction to income inequalities and redistribution in china

This special section presents the main findings about long-run trends in inequality in China and its driving factors as they emerge from a country case study carried out under a UNU-WIDER supported project.¹ Special focus in the umbrella project were on three issues: (i) the role of earnings inequality and its determinants; (ii) the role of top incomes when administrative records or other sources can be combined with household surveys; and (iii) the redistributive impact of public policies. Main findings of the project including those for China results were presented in a special panel during the UNU-WIDER Think Development – Think WIDER development conference held in Helsinki in September 2018.²

1. Motivation

Inequality has once again emerged as a major issue in economic development across the developed and developing world, and addressing this challenge is key in the UN Sustainable Development Agenda. The UNU-WIDER conference on Mapping the Future of Development Economics held in Helsinki in September 2016³ led to the formulation of a project to study inequality in five major developing countries accounting for more than 40 per cent of the world’s population. UNU-WIDER implemented these studies under its Inequality in the Giants project,⁴ designed as part of a broader international effort to shed light on a set of new questions on between-country and within-country inequalities, by generating integrated datasets and applying a consistent methodology to investigate the determinants of inequality dynamics in some of the world’s largest economies. China was included among the five case countries, and the effort included both a series of papers on China, produced under the coordination of Professor Shi Li and various workshops and meetings. Coming to grips with inequality in China is an obvious priority for anyone interested in trends in global inequality; and the present special section contains five key papers produced in the context of the UNU-WIDER project and subsequently accepted for publication by the China Economic Review.

2. Content of the special section

The five papers on inequality in China presented in this special section cover different topics and jointly illustrate a key set of important themes in the recent evolution of China’s income distribution.The opening study by Luo, Li, and Sicular (LLS) provides an overview and analysis of the long-term evolution of inequality in China, while the next three papers — on urban wage inequality, public transfers, and top incomes — each illustrates and delves more deeply into important aspects of the broader trends in inequality.What are the main findings of these papers? The core finding is that inequality in China rose markedly from the 1980s through the early 2000s; only since 2008 has the upward trend stopped or reversed. LLS report and examine the underpinnings of this core finding, using the five waves of the China Household Income Project surveys conducted during 1988-2013. This paper also finds a considerable, ongoing reduction in rural poverty, and a poverty decomposition analysis indicates that this poverty reduction was mostly due to income growth rather than redistribution in rural areas.The second paper by Gustafsson and Wan (GW) is on urban wage inequality from 1988 to 2013 and it sheds further light on the changes in the distribution of wage earnings. The authors highlight that average wages have grown rapidly and that wage inequality increased until 2007. Moreover, age has become weaker and education stronger related with wage. Importantly, the gender wage gap once small widened rapidly between 1995 and 2007, and workers in foreign owned firm and the state sector enjoy a wage premium.While wages are the most important component of income, it is only part of the inequality story. One important additional question is the role of government taxes and transfers. Since the early 2000s, China has embarked on a major effort to put in place a universal social safety net. The study by Cai and Yue (CY), which is the third paper, assess the consequences of these efforts. Their key conclusions include that the same public policy may produce different redistributive implications. Moreover, if the government keeps increasing the social security transfer scale without changing its distribution, then inequality will increase in China. In addition, formal-sector pension takes up the biggest share and is the most un-equalizing sub-item of all social security transfers; and related to the first paper in the special section they argue that the government should spend more on Dibao and rural residents pension to reduce inequality.Arguably, income inequality measured using household survey data understates actual inequality because surveys have difficulty in capturing top incomes. In the Chinese case, concerns about such bias have increased in the past ten years due to the expansion of private wealth and growing numbers of super-rich. The fourth paper by Li, Li, and Wan (LLW) is on top incomes in China and it attempts to correct for this bias using income information for the Chinese super-rich from various sources. They conclude that the Gini coefficient of income inequality increases substantially when samples of top incomes are incorporated.Finally, Gradín and Wu (GW) analyse in the fifth and final study the distribution of income and expenditure in China in a telling comparative perspective with India. Both countries represent two extreme cases in the relationship of inequality using both wellbeing indicators. It emerges that the joint distribution of income and expenditure differs between China and India because there is a higher prevalence of people with a large mismatch between their ranks in income and consumption in India, especially in rural areas, and particularly amongst those reporting low income and high expenditure. The main compositional effects identified are the different demographic and geographical composition of the countries’ populations, mostly the smaller households (especially in rural areas) and the higher level of urbanization in China than in India. The lack of consistency of cross-country comparisons based on income or expenditure calls for the use of hybrid inequality measures combining data on both provided they are available in the same survey.

3. Concluding remarks

The studies brought together in this special section provide telling insights about the trends in inequality in China from which scholars and policy makers can learn a great deal. In a global perspective, further increases in China’s mean income and wealth, both now above the global means, will begin to raise global between-country inequality. This is important in and of itself. Moreover, while we cannot expect that all the world’s poorest countries will follow the same path as China considering that the initial conditions and the international context they face will be very different, the experiences from China do reinforce the observation that much can be done by policy to influence inequality outcomes. In particular, and as argued by Gradin, Leibbrandt, & Tarp, 2020 (forthcoming):“well-functioning labour markets that promote job-creation, decent pay and social inclusion, removing any legal or de facto discrimination based on gender, race, ethnicity or place of origin, providing equal access to human and physical capital, and empowering the most disadvantaged population groups, are a key driver of increased equality”.These insights also emerge clearly from the five China studies in this special section.     

Basic education and income inequality in Brazil

This paper attempts to elucidate the long-term impact of basic education on income inequality in Brazil. It does so, first, by examining how investment in basic education affects incomes and, second, by assessing the extent to which government involvement in the financing of education services and the taxing of the returns of education investment contributes to the achievement of a more equitable distribution of income.On the basis of the empirical evidence available in Brazil, it is possible to suggest that: (i) education per se cannot significantly reduce inequality, (ii) government policies in terms of education subsidies and taxes on lifetime earnings do not show a clear redistribution pattern, and (iii) there exist effective policy tools in the area of employment, education wastage, cost recovery practices which could help bridge the gap between rates of return to education and reduce income inequality.     

The long-term evolution of national income inequality and rural poverty in China

Using the five waves of the China Household Income Project surveys conducted during 1988–2013, we investigate long-term changes in national income inequality and rural poverty in China. National income inequality rose markedly to 2007 and thereafter fell slightly. Income growth was widely shared, but inequality increased because the high-income percentiles had faster income growth than lower percentiles and because the gap between urban and rural household incomes widened. The fall in income inequality after 2007 reflects faster income growth among low-income percentiles and the impacts of newly introduced redistributive policies. The paper also finds a considerable, ongoing poverty reduction in rural China. A poverty decomposition analysis indicates that this rural poverty reduction was mostly due to income growth rather than redistribution.     

The Kuznets curve: Evidence from Prussia revisited

Conclusions To avoid confusion arising from mixing up methods, the methodological arsenal was restricted to the computation of percentiles as this was the favoured device in the Kuznets-paper. But with an increasing population the interpretation of rising percentiles is by no means straightforward (which is equally true with other measures of inequality). When the number of income-receiving units and their mean income are held constant, rising shares of the top-income receivers can be interpreted in terms of “rich people getting richer and poor people getting poorer”. But when both, the number of units and their mean income are rising, the interpretation of rising percentiles is quite a problem. For example, aggregating two populations with all percentiles alike (i.e. identical Lorenz curves) but different mean incomes would result in a greater population with increased shares of the top-income receivers and lessened shares of the low-income receivers (i.e. a Lorenz curve more close to the boundaries of the rectangle). It is obvious from this example that the welfare implications of increasing percentiles cannot be separated from the welfare implications of rising mean incomes. Especially, with rising populations and rising mean incomes the income shares of the top-income receivers may very well increase without any poor man getting poorer, so that not even Rawls [1971] would necessarily object to such a development. Bearing these limitations in mind, the outcomes of the previous sections may be summarized in confirming Kuznets’ surmise that income inequality in Prussia increased within the second half of the last century. Furthermore, it is emphasized that the peak was most probably reached around the turn of the century with the First World War merely fortifying the equalizing tendencies which originated from the economic development process itself.     

The Economics of Suicide,Revisited

Only a small fraction of suicide attempts are fatal. Nonfatal attempts might elicit resources and care from others, enhancing economic prospects for those who survive. I expand the standard utility-maximizing model of suicide to include a nontrivial probability of survival and the possibility that the utility function may be affected by the suicide attempt. This expanded model predicts that suicide attempts are more likely when future income may be positively affected by the attempt, conditional on survival. Data from the National Comorbidity Survey show that ex post, individuals who made a suicide attempt had higher incomes than peers who seriously considered suicide but who never made a suicide attempt. Moreover, those who reported making the most serious attempts experienced the largest subsequent effects on income.     

The impact of agricultural technology adoption on income inequality in rural China: Evidence from southern Yunnan Province

This study analyzes the impact on income inequality of government efforts to increase agricultural incomes in rural China. It collects and analyzes survey data from 473 households in Yunnan, China in 2004. In particular, it investigates the effects of government efforts to promote improved upland rice technologies. Our analysis shows that farmers who adopted these technologies had incomes approximately 15% higher than non-adopters. Despite this relatively large increase, we estimate that the impact on income inequality was relatively slight. This is primarily due to the fact that lower-income farmers adopted the improved rice technology at rates that were roughly equivalent to those of higher-income farmers.     

Demographic change and income inequality in the United States, 1976-1989

"The U.S. economy experienced significant increases in the degree of income inequality over the past two decades.... In this paper we consider the effects of race, age, female headship, and college education on the distribution of family income by developing a multivariate methodology that allows us to gauge the influence of one factor while holding other determinants of family incomes constant. Over the period studied we find that race had only a minor effect on the overall size distribution of income. Age had a somewhat greater effect than race. In contrast, the impact of female heads and college education were quite substantial. The multivariate estimates reveal that the effects of female heads and college education both increase the Gini to a much greater extent than the progressivity of federal income taxes decreases it. The effects of college education and female headed families on inequality have grown larger across time, while the influence of age has declined. We find that the effects of race on inequality have changed little over the 1976 to 1989 period."     

Perspectives on poverty and income inequality in Brazil

Exploratory analysis of the advance tabulations of the 1980 Brazilian demographic census suggests the proportion of the population in poverty fell during the decade 1970–1980. The degree of inequality of the distribution of the income of individuals apparently remained about the same from 1970 to 1980, after rising in the 1960s. This near-constancy of the overall inequality of income distribution resulted from two offsetting changes: a narrowing of the gap between rural and urban incomes, and greater inequality within the rural sector.     

Inequality in China revisited. The effect of functional distribution of income on urban top incomes,the urban-rural gap and the Gini index, 1978–2015

Most analyses explain the increase in China's overall inequality during the reform period principally by means of the expansion of urban-rural income gap. This paper tries to state a relationship between functional distribution of income and China's Gini index. After presenting the main theoretical contributions that clarify the general relationship among those variables, we describe the mechanism that has connected them during the last decades in the Chinese economy. There exists a link between falling wage share, rising urban households' top incomes, urban-rural income gap and the Gini coefficient. These relationships are analysed for both the pre and post-crisis periods. After estimating the main relationships, the paper ends with a discussion on the ability of potential redistributive policies to reverse this pattern of inequality.     

Active citizen's income, unconditional income and participation under imperfect competition: a welfare analysis

Various types of basic income schemes are considered to compensatethe allocative inefficiencies induced by unemployment benefits.A dynamic general equilibrium model of a unionised economy isdeveloped in which participation to the formal labour marketis endogenous and the budget of the State has to balance. Itis shown that basic income schemes reduce the equilibrium unemploymentrate. Assuming that job-search is costly to monitor, the normativeanalysis suggests that only the active population should beeligible to the basic income. Introducing such an ‘activecitizen’s income’ can be a Pareto-improving reform.     

Carbon emissions and income inequality

We find that the distribution of income matters to aggregatecarbon dioxide emissions and hence global warming. Higher inequality,both between and within countries is associated with lower carbonemissions at given average incomes. We also confirm that economicgrowth generally comes with higher emissions. Thus our resultssuggest that trade-offs exist between climate control (on theone hand) and both social equity and economic growth (on theother). However, economic growth improves the trade off withequity, and lower inequality improves the trade off with growth.By combining growth with equity, more pro-poor growth processesyield better longer-term trajectories of carbon emissions.     

Migration,population aging,and income inequality in China

In this study, we examine the effects of four demographic factors, namely, birth, death, natural aging, and net migration, on population aging and income inequality in China. We use the official Chinese data and the China Household Income Project Survey data for the 2007–2013 period and apply a decomposition model based on the Shapley method. Unlike previous studies, we include migration in our decomposition model and find that natural aging is the primary factor contributing to population aging in both urban and rural areas. Further, migration may accelerate population aging in rural areas. Moreover, migration contributes to reducing income inequality in urban areas, while widening income inequality in rural areas. The effect of migration is larger than those of birth, death, and natural aging on income inequality. The robustness checks confirm these conclusions.     

Unequal access to education and income distribution

Summary This paper attempts a new specification of the education variable in accounting for differences in income distribution in a cross-sectional analysis of 49 countries. The specification refers to the steepness of the educational pyramid, as measured by the coefficient of variation of enrolments within a given country. This variable alone explains 23 per cent of income inequality across countries (as measured by the Gini coefficient), while in the presence of it the traditional (catch-all) per capita income variable becomes insignificant.This finding indicates the importance of the supply side in relative income determination. It is also suggestive that a policy aiming at equalisation of access to the different levels of education might help in reducing income inequality.I would like to thank Arnold Anderson, Mary Jean Bowman, Jan Tinbergen and Peter Wiles for commenting on an earlier draft of this paper.     

On the geometry and the numerical approximation of cost of living and real income indices

Summary The economic theory of the “true” cost of living and real income index numbers is described and illustrated geometrically in the logarithmic price-income space. Special attention is paid to the real income index evaluated at the geometric means of the prices in the two periods and to the cost of living index evaluated at the utility level which is associated with these geometric mean prices and geometric mean income. It is shown that this particular pair of index numbers is the only pair which satisfies a certain simple set of axioms. It is also shown how these index numbers can be approximated on the basis of observable price-quantity data. The approximation is accurate up to the second order in price and income log-changes.     

World economy,level development and income distribution: An integration of different approaches to the explanation of income inequality

The paper briefly outlines explanations of international differences in personal income distribution that have been formulated within the ‘world economy’ and the ‘level of development’ paradigm. The predictive power of the central variables of the paradigms are tested in a cross-national regression analysis with 72 countries. The regression results suggest support for hypotheses from both paradigms, but also suggest a partial integration of theoretical elements from both paradigms. The outcome of the proposed theoretical integration offers a new interpretation of the well-known curvilinear relationship between level of development and income inequality. This new view on the curvature of the relationship expects the integration into the world economy to result in increased income inequality in peripheral countries. But different from other views it is not implied that inequality is substantially reduced in development. The core and periphery position of countries in the world economy is seen to stabilize income inequality differences between these groups of countries. Under these circumstances, developing countries generally cannot be expected to reduce substantially their income inequality in the course of economic growth.