Rising Earnings Inequality in Urban China during 1988-2007

Li ShiSchool of Economics and Business Administration, BNU

Song JinSchool of Economics and Business Administration, BNU

andDeng Quheng

Institute of Economics, CASS

Background Economic reform in China since early 1990s.

The privatization of state-owned enterprises;

The development of private firms and self-employment;

The reform of wage systems in public sector.

Wage reforms ongoing within SOES

To enhance incentives, distribute wage according to performance of workers and enlarge wage

differentials among workers.

BackgroundFigure 1. Number of workers in state-owned and urban collective enterprises

as a percentage of all workers in urban China.

0

10

20

30

40

50

60

70

801988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

%

state-owned

col l ecti ve

Source: National Bureau of Statistics (2008).

Background

Meanwhile, increasing income

inequality from 1980s.

For Gini coefficient,

China as a whole: 0.28 (1983)—0.48 (2007)

Urban China: 0.17 (1983)—0.36 (2007)

Research Questions

What are the main driving forces for

increasing income inequality?

Different characteristics distribution?

Different earnings determination mechanism?

To what extent do they contribute?

Structure

Brief literature review

Methodology introduction

Data used and descriptive statistics

Regression analysis

Decomposition results

Summary

Brief Literature Review

Factors studies mentioned that are important in earning determination.

Education attainment, work experience, ownership,

industry, region, gender, minority

Brief Literature Review-1

Education attainment

1. Rising returns to education in urban China since

the mid 1980s (Li and Lee, 1993; Lai, 1999; Li and

Ding, 2003; Park et al, 2007).

3.8%(1988)-5.7%(1995)-8.1(1999)

2. Returns to education also increase with education

level.

3. Increasingly strong explanatory power for

earnings differentials.

Brief Literature Review-2

Work experience

Decreasing role in earnings determination in urban China at beginning of economic reform.

In the planned economy, seniority was more important.(Knight and Song, 1993)

Between 1981-1987, wage of SOE workers increased with work experience.

(Meng and Kidd, 1997)

From the mid 1990s, the relationship weakened(Knight and Song, 2008)

Brief Literature Review-3

Ownership, Industry and Region

Earnings: top: foreign enterprises

bottom: collective enterprises;(Zhao, 2002; Chen et al, 2005)

For unskilled workers: SOEs > foreign enterprises;

For skilled workers: SOEs < foreign enterprises.(Zhao, 2002)

Segmentation based on ownership and Hukou(Chen, et al, 2005; Demurger, et al, 2007, Demurger, et al,

2009 )

Brief Literature Review-4

Gender

Gender wage/ earnings gap was extremely small in early 1980s and increased in favor of male workers in urban China with economic reform.

(Gustafsson, Li, 2001; Li and Song, 2010)

Increasing number of the unemployed/ xiagang worker caused the decline of female participation rate.

(Meng, 2004)

Methodology Introduction--Decomposition of earning difference

Oaxaca/ Blinder (1973) decomposition Yt+j – Yt = t+j ( Xt+j – Xt ) + Xt (t+j – t)

Yt+j – Yt = t ( Xt+1 – Xt ) + Xt+1 (t+j – t)

When decompose earning growth between time

points,

First term – Changes in socioeconomic and job

characteristics of employees/ employers;

Second term – Changes in rewards to socioeconomic and

job characteristics of employees/ employers.

Methodology Introduction--Decomposition of earning inequality

Fields (1998) decomposition

The contribution of the jth income source to inequality indices of income.

2

cov( , ln ) * ( )* [ , ln ](ln )

(ln ) (ln )j j j j j

j

a z y a z cor z ys y

y y

Data Used

Urban survey of CHIPS Data set

CHIP– China Household Income Project

Collected by the Institute of Economics, Chinese Academy of Social Sciences, and later on by BNU.

Keeping people who were 16 to 60 aged workers with positive income, in our paper,

for 1988, 16991 individuals were selected;

for 2007, 9053 were selected.

Data Used

To combine these two datasets together,

1. Select the same provinces;

2. Adjust earnings of 2007 at 1988 prices;

3. Adjust provincial PPP;

4. Weight sample according to actual provincial

employment and employment in different

ownership.

Sample Description

0

10

20

30

40

50

60

70

1988 2007

Femal eMal e

Employment structure by Gender

Sample Description

Employment structure by Age Group

0

5

10

15

20

25

16-20 21-25 26-30 31-35 36-40 41-45 46-50 51-55 56-60

19882007

Sample Description

Employment structure by Education Attainment

05

1015202530354045

pri m

ary

and

l ess

midd

l e s

choo

l

high

sch

ool

prof

essi

onal

sch

ool

2yea

r co

l leg

e

4yea

r co

l leg

e

19882007

Sample Description

Employment structure by Ownership

0

10

20

30

40

50

60

70

col l ecti vesector

state-ownedsector

pri vate orsel f -empl oyed

otherownershi p

19882007

Earnings distribution Description

50

100

150

200

250

Me

an in

com

e

20 30 40 50 60Age

meanincome meanincome_mmeanincome_f

Mean income-Age Distribution_1988

02

00

400

600

800

100

0M

ean

inco

me

20 30 40 50 60Age

meanincome meanincome_mmeanincome_f

Mean income-Age Distribution_2007

Descriptive Statistics Annual growth rate: 8% on average

But growth rates vary with groups with different characteristics

Male > Female; 26-30 group >> 16-20 group

Han majority > minority; SOE > private sector

Well educated > less educated

Financial sector > trade and commerce

Coastal provinces > western provinces

Earnings peak earlier

Gender group

Female 3.8 Mean Income Ratio (07/88)

Male 4.35

Educational

attainment

primary and less 2.77

Ownership

collective sector 3.68

Minority group

Han 4.21 middle school 3.23 state-owned sector 4.52

Minority 3.61 high school 4.23 private or self-employed 1.05

Age group

16-20 2.54 professional school 3.45 other ownership 4.14

21-25 3.28 2year college 4.3

Industry

manafacturing 4.16

26-30 4.55 4year college 4.9 agriculture 5.15

31-35 4.49

Province

Beijing 4.29 mining 4.05

36-40 4.45 Shanxi 4.32 construction 4.31

41-45 4.08 Liaoning 3.44 transportation and communication 4.06

46-50 3.67 Jiangsu 4.11 commerce and trade 3.38

51-55 3.5 Anhui 3.59 public utilities 4.25

56-60 3.34 Henan 3.88 finance and insurance 5.37

Occupation

manual worker 3.39 Hubei 3.69 education and culture

4.51

office worker 4.26 Guangdong 5.12 health and social welfare 3.92

officer or manager 4.85 Yunnan 2.97 scientific research and

technology 4.82

professional or technician 4.5 Gansu 2.61 government and social

organizations 4.79

Regression Analysis

Dependent variable used:

Logarithm of yearly earnings of individuals

Independent variables used:

Gender, ethnic minority status, age group,

education, occupation, ownership, province

Regression Analysis-1

Coefficients of age groups from earnings function, 1988 and 2007

0

0. 2

0. 4

0. 6

0. 8

1

1. 2

21- 25 26- 30 31- 35 36- 40 41- 45 46- 50 51- 55 56- 60

19882007

Regression Analysis-2

Returns to education in urban China, 1988 and 2007

00. 10. 20. 30. 40. 50. 60. 70. 80. 9

19882007

Regression Analysis-3

Return to occupation in urban China, 1988-2007

0

0. 10. 2

0. 3

0. 40. 5

0. 6

office

work

er

office

r or

ma

nage

r

prof

essi

onal

orte

chni

cian

o

ther

s

19882007

Regression Analysis-4

Returns to province in urban China, 1988 and 2007

- 0. 3

- 0. 2

- 0. 1

0

0. 1

0. 2

0. 3

0. 4

0. 5

0. 6

0. 7

Bei j

i ng

Shan

xi

Liao

ning

J ian

gsu

Anhu

iHe

nan

Hube

i

Guan

gdon

g

Yunn

an

19882007

Oaxaca Decomposition- GeneralDecomposition of earnings growth (%)

Variable Attrib Endow Coeff

Gender group 8.02 0.93 7.10

Age group 38.89 5.40 33.56

Minority -0.31 0.00 -0.31

Education Group 30.71 12.35 18.29

Ownership 5.86 -2.24 8.26

Occupation 7.56 3.94 3.70

Industry 1.39 -0.08 1.39

Province 29.17 1.16 27.78

Constant -21.30 0.00 -21.30

Total 100.00 21.45 78.47

Oaxaca Decomposition- Quantile　 Endowment Coefficient Total

- due to endowments (E):

E%- due to

coefficients (C):

C% Raw differential (R) {E+C}:

10th 0.16 17.85 0.73 82.15 0.89

20th 0.14 13.67 0.86 86.33 1.00

30th 0.13 12.07 0.95 87.93 1.08

40th 0.14 11.78 1.03 88.22 1.17

50th 0.15 12.03 1.10 87.97 1.25

60th 0.17 13.03 1.17 86.97 1.34

70th 0.22 15.25 1.22 84.75 1.44

80th 0.29 18.86 1.26 81.14 1.55

90th 0.44 26.09 1.26 73.91 1.71

Oaxaca Decomposition- Quantile

123

0.5

11

.52

Log

rin

com

e ef

fect

s

0 .2 .4 .6 .8 1Quantile

Total differential Effects of characteristicsEffects of coefficients

Decomposition of differences in distribution

Lorenz Curve of Earnings in Urban China

0.2

.4.6

.81

0 .2 .4 .6 .8 1

1988 2007Diagonal

Lorenz Curve_ Income

Decompositions of Earnings Inequality

Earnings component

s

Wage income

Business income

Other income

Total earnings

1988 2007 1988 2007 1988 2007 1988 2007

Share (%) 91.54 89.29 0.05 8.69 8.41 2.02 100 100

Concentration ratio

0.21 0.36 3.49 0.52 0.29 0.49 0.22 0.37

Contribution to total

inequality (%)

87.9 85.33 0.83 12.23 11.28 2.44 100 100

Gini decomposition based on regressionExplanatory variables 1988 2007

gender 0.9 2.6

Age 7.3 8.6

minority 0 0

education 1.9 10.7

Ownership 4.2 0.5

Occupation 2.8 4.5

Industry -1 0.5

province 1.9 3.5

residual 82.2 69.2

Total 100 100

Conclusions

The earnings inequality has been significantly increasing in

urban China since the end of 1980s. In terms of Gini, the

increase is 70%.

For the driving forces behind,

The increased return to human capital

------Results of marketization process

The rising gap between gender and among regions/ownerships

------Market segmentation

Thank you !