Urban inclusiveness and income inequality in China

Abstract

The issue of income inequality is exacerbating when China experiences rapid economic growth during the past few decades. This paper argues that urban inclusiveness is one of the determinants of income inequality in Chinese cities, because the Hukou system restricts public service to Hukou-registered workers only. The impact of urban inclusiveness on income inequality and the underlying mechanism are discovered by examining how Hukou restriction affects income gap between skilled and unskilled workers and how the preferences on public services and urban inclusiveness vary across skilled and unskilled workers. With the 2005 Inter-Census Population Survey, we find skilled workers care more about public services and urban inclusiveness, so skilled workers are relatively scarce in exclusive cities, who hence can enjoy a higher skill premium, leading to higher income inequality in exclusive cities.