Created unequal: China's regional pay inequality and its relationship with mega-trend urbanization

• We measure China's regional pay inequality using between and within components of Theil's T Statistics.
• We examine changes in China's inequality trend from 1987 to 2012.
• We find China's regional pay inequality is closely associated with China's mega-trend urbanization.
• China has followed the similar trajectory as the Kuznets' curve predicts.
• China may have already crossed the Kuznets' threshold.

The relationship between inequality and mega-trend urbanization in China is complicated. At least in the first two decades of economic reform, urbanization is one of primary drivers of rising inequality across the country. Using between-and within-group components of Theil's T-statistics measured across regions and sectors, this paper provides new estimates of the evolution of China's regional inequality during the reform period. We particularly analyze the associations between inequality and China's megacities-oriented urbanization strategy. We find that China's overall pay inequality started to rise rapidly in the early 1990s, that it peaked in 2008, with the between-provinces component peaking as early as 2002. Since 2008 overall pay inequality has decreased, with between-province and within inequality both showing steady declines. In these respects, the evolution of pay inequality in China mirrors the trajectory expected under the hypothesis of a Kuznets' curve.