Income polarization in China: Trends and changes

•A time profile of income polarization is provided for China during 1978-2010. It exhibited a broadly increasing trend.•Income polarization was large and rising among rural citizens while low and declining among urban citizens. It declined among migrants.•Income polarization rose in east and central China, and west China was most polarized with little changes over time.•The rise in polarization between 2002 and 2007 was mainly driven by the investment income, followed by transfers.

This paper estimates income polarization in China from 1978 to 2010 and decomposes the estimated polarization by population subgroups. In addition, a framework is proposed to disentangle a change in polarization into a growth and a redistribution component. This framework is then used to quantify the contributions of various income sources to a rise in polarization in China between 2002 and 2007. The analytical results suggest that (1) income polarization exhibited a broadly increasing trend from 1978 to 2010; (2) income polarization was large and rising among rural citizens, while low and declining among urban citizens; polarization of migrants also declined; (3) geographically, income polarization rose in east and particularly central China, while west China was most polarized with little change over time; and (4) the rise in polarization between 2002 and 2007 was mainly driven by the investment income, followed by transfers. Conversely, business income is polarization-reducing, especially in rural China. To a lesser extent, wage is also polarization-reducing, especially among migrants.