Remaking Inequality: Institutional Change and Income Stratification in Urban China

Abstract

ABSTRACT This paper examines how China's institutional changes toward market transform the income inequality in the urban economy. We highlight the replacement of bureaucratic allocation with market on three levels: the creation and expansion of the private/hybrid sector that is relatively autonomous from direct state control, public firms' reduced dependence on the state and growing exposure to market discipline, and the emergence of urban labor markets. In-depth analysis of data collected in two southern Chinese cities during the mid-1990s provides strong and systematic support to market transition theory's core claim that the transition toward a market economy leads to higher income returns to human capital. Although there are also signs of persistent advantages based on political capital, these advantages are limited to senior members of the communist party only and small in magnitude in comparison to those associated with market-based opportunities.