From Price to Gain: The Evolution of Household Income Volatility and Consumption Insurance in Urban China

Abstract

AbstractThis paper exploits a novel and unique opportunity to reveal the evolution of income volatility and consumption insurance from 1992 to 2014 in urban China. We found that (i) the average household experienced a downward trend in income and consumption volatility. Although the global financial crisis in 2008 caused a slight spike, it did not reverse the downward trend. (ii) Households' ability to smooth income shocks improved significantly, and the consumption insurance against permanent (transitory) income shocks increased from 0.6172 (0.8307) to 0.7453 (0.8742) – that is, the transmission of permanent (transitory) income shocks to consumption decreased by 33.46 (25.69) percent from 2004 to 2014. (iii) Welfare analysis indicates that the positive insurance effect counteracted the negative effects of lower economic growth in the 2010–2014 period. Income and consumption volatility, and consumption insurance were heterogeneous across income sources, consumption categories, and various demographic characteristics, which have important implications for understanding China's economic transition.