Abstract
This paper examines underlying factors that could explain the decline in income inequality in the People’s Republic of China (PRC) since 2008 and inquires whether the decline indicates that the PRC’s income inequality has peaked following the Kuznets hypothesis. The paper first identifies four key drivers of rising income inequality in the PRC since the mid-1980s: rising skill premium, declining share of labor income, increasing spatial inequality, and widening inequality in the distribution of wealth. It then provides evidence that the reversal of these drivers, with the exception of wealth inequality, could partly explain the decline in income inequality since 2008. The paper argues that since part of the reversal of these drivers is policy induced, it is important that the policy actions continue for income inequality to decline further. The paper further argues that a critical factor underlying the Kuznets hypothesis is that taxation and transfers play a bigger role in income redistribution as a country becomes more developed, while their role is still limited in the PRC, the future path of the country’s income inequality may not be one directional; and reducing income inequality significantly may require personal income tax and transfers to play a greater role over time.
Highlights
Rising income inequality in the People’s Republic of China (PRC) since economic reform started in the late 1970s has attracted considerable attention by policy makers and researchers in and outside the country in recent years (Li, Wan, and Zhuang 2014)
The paper further argues that a critical factor underlying the Kuznets hypothesis is that taxation and transfers play a bigger role in income redistribution as a country becomes more developed, while their role is still limited in the PRC, the future path of the country’s income inequality may not be one directional; and reducing income inequality significantly may require personal income tax and transfers to play a greater role over time
The previous section shows that rising skill premium, declining share of labor income and rising share of capital income, widening urban–rural income gap and regional inequality, and increasing wealth inequality have been among key drivers of rising income inequality in the PRC in recent decades
Summary
Rising income inequality in the People’s Republic of China (PRC) since economic reform started in the late 1970s has attracted considerable attention by policy makers and researchers in and outside the country in recent years (Li, Wan, and Zhuang 2014). The return to human capital is reflected in the skill premium, that is, the more educated and skilled labor earns higher wages Income inequality estimates, such as the Gini coefficient, are often based on per capita household income, that is:. These are in turn determined by technological advances and the bias of technical progress; the relative bargaining positions of labor and capital; political economy factors such as labor market institutions (minimum wages, collective bargaining, and employment protection); taxation; and the presence or absence of market distortions Within this framework, income inequality will increase if changes in relative returns to labor and to capital, or in the distribution of labor assets and capital assets, or in the relative importance of labor and capital incomes in total income favor the better-off households. Inequality in wealth could increase if wealthier households save more, if they receive higher returns to capital due to economies of scale or if they have lower fertility rates than less-wealthy households
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