Decomposition of the increase in earnings inequality in urban China: A distributional approach

This study examines changes in Chinese urban income distribution from 1987 to 1996 and 1996 to 2004 using nationwide household data and investigates the causes of these changes. The Firpo, Fortin, and Lemieux (2007, 2009) method based on unconditional quantile regressions is used to decompose changes in income distribution and income inequality measures, such as variance and a 10:90 ratio. The decomposition results show that wage structure effects, such as a widening gender earnings gap, increases in returns to college education, and increases in earnings differentials between industries, company ownership types, and regions, have been the major contributors to the overall increases in income inequality. It was also found that at different points on the income distribution (e.g., the lower or upper half), the contributing factors that increase income inequality are different.

Research highlights► We examine changes in Chinese urban income distribution during 1987-1996 and 1996-2004. ► Changes in income distribution and inequality are decomposed into the wage structure and composition effect. ► The wage structure effect is the main contributor to the overall increase in income inequality. ► At different points on the income distribution, the contributing factors to inequality are different.