China’s extreme income inequality finally appears to be falling

Economic inequality is rising in emerging economies across the world, with one very big exception.

According to recent research (pdf) by economists from Cornell University and Peking University, income inequality in China is falling. The researchers conclude that, after rising dramatically in the 1990s and 2000s due to rapid growth and urbanization, Chinese income inequality reached an inflection point around 2010. Since then, there has been a small but steady reduction in inequality.

The chart below shows the Gini coefficient of Chinese income from 1995 to 2014. The Gini coefficient is the most commonly used measure of inequality by economists—a higher Gini means higher inequality. (See here for more about how the Gini works.)

This is the chart of Simon Kuznets’ dreams. Kuznets, a mid-20th century economist, famously hypothesized that for industrializing countries, income inequality would at first rise, but eventually begin to fall as the population got richer. It rises because the rural workers who migrate to cities make more money than those they left behind—urban work is more productive than rural work, and thus there is more demand for workers in cities than the supply in the early stages of industrialization. However, eventually, inequality starts to fall as a large proportion of people receive relatively high city wages. At the same time, rural workers also start to get paid more as fewer workers remain in the countryside, reducing the supply of labor and improving workers’ bargaining power.

The Cornell and Peking economists think Kuznets’ vision is a good description of what has actually happened in China. They also think that government interventions, such as minimum-wage regulations and increases in the social welfare state, likely contributed to the fall in income inequality.

In addition to examining the Gini coefficient, the researchers also considered other measures of inequality, like the ratio between the 90th and 10th percentiles of earners and general entropy indices (pdf). By nearly every measure, inequality has either declined since 2010, or has plateaued. One concern with their conclusion is that they may understate the level of inequality—but not the overall trend—because wealthy Chinese have become increasingly likely to hide their income from officials (paywall). To construct their series of inequality, the researchers had to combine different data sets based on nationally representative surveys, all of which were collected with some involvement from China’s National Bureau of Statistics.

Even if Chinese income inequality is falling, it remains high relative to other big countries—only Brazil has a higher Gini coefficient among the world’s 10 largest economies. The differences in living standards between coastal and inland residents in China remains stark. For the country’s rapid economic growth to become more inclusive, the apparent start of a trend towards falling inequality will need to continue for many decades to come.

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