China’s Income Distribution over Time：reasons for

China’sIncomeDistributionoverTime:ReasonsforRisingInequalityXimingWuDepartmentofEconomics,UniversityofGuelphJeffreyM.PerloffDepartmentofAgricultural&ResourceEconomics,UniversityofCalifornia,BerkeleySelectedPaperpreparedforpresentationattheAmericanAgriculturalEconomicsAssociationAnnualMeeting,Denver,Colorado,July1-4,2004Copyright2004byXimingWuandJeffreyM.Perloff.Allrightsreserved.Readersmaymakeverbatimcopiesofthisdocumentfornon-commercialpurposesbyanymeans,providedthatthiscopyrightnoticeappearsonallsuchcopies.AbstractWeuseanewmethodtoestimateChina’sincomedistributionsusingpubliclyavailableintervalsummarystatisticsfromChina’snationalhouseholdsurvey.Weexaminerural,urban,andoverallincomedistributionsforeachyearfrom1985-2001.Byestimatingtheentiredistributions,wecanshowhowthedistributionschangedirectlyaswellasexaminetrendsintraditionalwelfareindices.Wefindthatinequalityhasincreasedsubstantiallyinbothruralandurbanareas.Usinganinter-temporaldecompositionofaggregateinequality,wedeterminethatincreasesininequalitywithintheruralandurbansectorsandthegrowingrural-urbanincomegaphavebeenequallyresponsibleforthegrowthinoverallinequalityoverthelasttwodecades.However,therural-urbangaphasplayedanincreasinglyimportantroleinrecentyears.Incontrast,onlythegrowthofinequalitywithinruralandurbanareasisresponsiblefortheincreaseininequalityintheUnitedStates,wheretheoverallinequalityisclosetothatofChina.Wealsoshowthaturbanconsumptioninequality(whichmaybeabetterindicatorofeconomicwell-being)roseconsiderably.JELCode:O15,O18,O53IntroductionUsinganewtechniquetoestimateincomedistributionsfromgroupedsummarystatistics,weshowthatChineseincomeinequalityrosesubstantiallyfrom1985to2001becauseofincreasesininequalitywithinurbanandruralareasandthewideningrural-urbanincomegap.WefindthatChina’sdramaticeconomicgrowth—afive-foldincreaseintheeconomyandafour-foldincreaseinpercapitaincomesincetheearly1980s—hasdisproportionatelyfavoredtheurbanareasandtherich.Wealsoshowthattheruralandurbanincomedistributionshaveevolvedalongseparatepaths,andthisdivergencehascontributedmarkedlytotheriseintheoveralllevelofinequality.AlthoughafewarticleshavereportedthatincomeinequalityinChinaincreasedrapidlyoverthelasttwodecades,noneshowsbyexactlyhowmuchinequalityrosebecauseoftheabsenceofconsistent,reliableincomedistributionestimatesovertime.TheChinesegovernmentprovidesGiniindicesforonlyafew,randomyearsusingunspecifieddatasources,incomedefinitions,andmethodologies,henceitsinequalitymeasuresmaynotbedirectlycomparableovertime(Bramall,2001).Moreover,theGiniindexonlyreflectssomeaspectsoftheunderlyingincomedistribution:Alargeamountofinformationislost.TwoLorenzcurveswiththesameGinivaluemayhavedifferentshapes.Thus,welfareimplicationfromcomparingGinicoefficients(orothersummarystatistics)maybeambiguous.Consequently,wereportseveralsummarystatisticsaswellasreliableestimatesoftheentireincomedistribution.Throughoutourpaper,wecompareChinesetoU.S.incomedistributionstoillustratethat,thoughbothcountriescurrentlyhavesimilarGiniindexes,thereasonsthesecountriesareexperiencinggrowinginequalitydiffer.2Thispapermakesfourcontributions.First,weusethenewmethodintroducedinWuandPerloff(2003)toestimateflexibleincomedistributionfunctionswhensummarystatisticsareonlyavailablebyintervalsratherthanfortheentiredistribution.UsingtheincomesummarystatisticsbasedonChina’sannualnationalhouseholdsurvey,weestimaterural,urbanandoverallincomedistributionsforeachyearfrom1985through2001.Basedontheseestimatedincomedistributions,weprovidethefirstintertemporally-comparableseriesofincomeinequalityestimatesofChinabasedonasingleconsistentdatasource,methodology,andsetofdefinitions.Second,weshowhowtherural,urban,andoverallChineseincomedistributionsevolvedovertime,andnotmerelyhowanarbitrarilychosensummarystatistic,suchastheGini,changed.Weshowthattheruralandurbanincomedistributionsevolvedalongdifferentpaths.Third,wedecomposeChina’stotalinequalitybetweenruralandurbansectorstoexplorethedistributionalimpactsofincomegrowth,rural-urbanincomegap,andmigrationovertime.Weshowthattherisinginequalitywithinbothruralandurbanareas,thewidenedrural-urbanincomegap,andtheshiftofpopulationsbetweenthesetwoareaswereresponsiblefortheriseinaggregateinequality.Weshowthatthewideningrural-urbanincomegapplayedamajorroleinChinaunlikeintheUnitedStateseventhoughbothcountrieshaveroughlyequallevelsofoverallincomeinequality.Fourth,weexaminetheconsumptioninequalityforurbanareas.Consumptioninequalityisanalternativeindicatorforeconomicwell-being.WefindthattheconsumptioninequalityisalsorisingrapidlyinChina.CausesofIncreasedInequalityTheexistingliterature(KhanandRiskin1998,GustafssonandLi1999,Yang1999,Li2000,andMeng2003)arguesthatincomeinequalityhasincreasedmarkedlyinChinaoverthe3lastcoupleofdecades.KhanandRiskin(1998)andLi(2000)alsoprovidelimitedevidencethatChina’sruralandurbanincomeinequalitydifferandaregrowingatdifferentrates.WewillpresentevidencethattheincreaseinChina’soverallinequalityisduetoincreasesinwithininequality,theinequalitywithintheruralsectorandwithintheurb