Rethinking Income Inequality in Japan and China (1995–2007)

Abstract

Most countries are grappling with the rising income inequality problem and many governments believe that it is important to reduce income inequality. This is because income inequality is associated with a variety of ‘negative’ outcomes (e.g., protest and low citizen well-being). This seemingly common-sense argument hinges on an untested assumption: Changes in a country’s level of income inequality affect how its citizens perceive and evaluate income inequality. This article argues that this is not theoretically plausible and shows with evidence from China and Japan from 1995 to 2007, that the income inequality of the context a person is embedded in does not systematically affect his or her perception and evaluation of income inequality. Instead, it is the individual socio-psychological factors that affect individual subjective evaluation of income inequality. Thus, while government officials in China and Japan are quick to implement policies that lower the objective dimensions of income inequality, more efforts should focus on subjective income inequality. Simply using the metric of objective income inequality indices (e.g., Gini ratio) as a measure of policy impact may blindside policy makers to the more important subjective income inequality, that is, how people perceive and evaluate everyday income inequality.