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Decomposition of the Increase in Earnings Inequality in Urban China: A Distributional Approach

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Abstract

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.

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... See Song (2003, 2008),Xue (2008),Cai, Park, and Zhao, (2008),Chi, Li, and Yu (2011), Démurger, Li, and,Ge and Yang (2012),Sheng and Zhao (2013),Xia, Li, Song, and Appleton (2014), etc. ...
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... These methods concentrate on the mean of the wage distribution, hence they provide a limited understanding of gender gap (Autor et al., 2006). Later, there was surging interest in examining gender earnings gaps across an earnings distribution, not just a simple mean comparison (Albrecht et al., 2003;Barsky et al., 2002;Chi & Li, 2008;Chi et al., 2011;Ge et al., 2011;Li & Dong, 2011). These kinds of analyses can provide more information which may be hidden in the mean-level analysis and can help to test the real situation of earnings gaps among different earnings groups (Ge et al., 2011;Sakellariou, 2012). ...
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A considerable literature exists on the measurement of income inequality in China and its increasing trend. Much less is known about the driving forces of this trend and their quantitative contributions. Conventional decompositions, by factor components or by population subgroups, provide only limited information on the determinants of income inequality. This paper represents an early attempt to apply the regression-based decomposition framework to the study of inequality accounting in rural China, using household-level data. It is found that geography has been the dominant factor but is becoming less important in explaining total inequality. Capital input emerges as a most significant determinant of income inequality. Farming structure is more important than labor and other inputs in contributing to income inequality across households. Copyright United Nations University 2005.
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Using two large samples for 1988 and 1995 we decompose the Gini coefficient of household income according to type of income with the purpose of analyzing reasons for the rapid increase of inequality. The results show that the change in relative size of money income and its changed profile are found to be the major processes behind the rapid increase of income inequality in rural China. Changes in housing allocation and an increased number of retirees in combination with higher benefits have made inequality increase in urban China and in China as a whole.JEL classification: D31, P27.
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Abstract Two strictly comparable cross-section household datasets, relating to 1988 and 1995, are used to analyse the increase in wage inequality from an initially low level in urban China over this period of labour market reform. The institutional background and the evolution of policy are described. The rapid growth of wage inequality and the sharp widening of wage structure are quantified. Earnings functions are compared, and the increase in both the level and the inequality of wages are decomposed into their constituent elements. Quantile regression analysis is conducted to throw light on the relationships between the observed and the unobserved determinants of wages. Distinctions are made between the variables likely to represent human capital, discrimination, and segmentation. The evidence suggests that productive characteristics were increasingly rewarded as marketization occurred, but that discrimination and segmentation also grew. The move towards a fully-fledged labour market was by no means complete. JEL classifications: J31, J41, J42, J71, D31, D63.
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Regressions explaining the wage rates of white males, black males, and white females are used to analyze the white-black wage differential among men and the male-female wage differential among whites. A distinction is drawn between reduced form and structural wage equations, and both are estimated. They are shown to have very different implications for analyzing the white-black and male-female wage differentials. When the two sets of estimates are synthesized, they jointly imply that 70 percent of the overall race differential and 100 percent of the overall sex differential are ultimately attributable to discrimination of various sorts.
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Using 1987, 1996, and 2004 data, we show that the gender earnings differential in the Chinese urban labor market has increased across the earnings distribution, and the increase was greater at the lower quantiles. We interpret this as evidence of the stronger “sticky floor” effect. We use the reweighting and recentered influence function regression methods proposed by Firpo, Fortin, Lemieux to decompose gender earnings differentials across the earnings distribution [Firpo, S., Fortin, N.M., Lemieux, T., 2007a. Unconditional quantile regressions. Technical working paper No. 339, NBER; Firpo, S., Fortin, N.M., Lemieux, T., 2007b. Decomposing wage distributions using influence function projections. Working paper. Department of Economics, University of British Columbia]. We find that gender differences in the return to labor market characteristics, also known as the “discrimination effect” or “unexplained gender pay gap,” contribute more to the increase in the overall gender earnings differential than do the gender endowment differences. The Firpo et al. method allows us to further decompose the gender earnings gap into the contribution of each individual variable. We find that the “sticky floor” effect may be associated with a particularly low paid group of female production workers with relatively low education working in non-state owned enterprises. Journal of Comparative Economics36 (2) (2008) 243–263.
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This paper proposes a framework for inequality decomposition in which inequality of the target variable, e.g., income, can be decomposed into components associated with any number of determinants or proxy variables in a regression equation. The proposed framework is general enough to be applied to any inequality measure and it imposes few restrictions on the specification of the regression model. This generality is illustrated by quantifying root sources of regional income inequality in rural China using a combined Box–Cox and Box–Tidwell income-generating function. Journal of Comparative Economics32 (2) (2004) 348–363.
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A labor market is beginning to emerge in urban China during a period of rapid growth and changed labor supply. In this paper, we investigate how earnings inequality and relative earnings have changed between 1988 and 1995 using two large samples covering 10 provinces. The results verify that, as expected, earnings inequality has increased rapidly. The expansion can be traced to two components, the basic wage and subsidies. The analysis shows that the growth in earnings inequality is not limited to certain segments of the labor force but affects all categories as defined by ownership sector, region, and education. J. Comp. Econ., March 2001 29(1), pp. 118–135. Department of Social Work, University of Göteborg, P.O. Box 720, SE 405 30 Göteborg, Sweden; and Institute for the Study of Labor (IZA), Bonn, Germany; and Institute of Economics, Chinese Academy of Social Sciences, 2 Yuetan Beixiaojie, Beijing, People's Republic of China. Copyright 2001 Academic Press.Journal of Economic Literature Classification Numbers: J31, O18, O53, P23.
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The gender wage gap and its development in urban China is analysed utilising two large scale surveys covering 10 provinces for the years 1988 and 1995. The results indicate that from an international perspective, the gender wage gap in urban China appears to be relatively small. It is, however, increasing. Decompositions based on estimated regression-models show that somewhat less than half of the average gender wage gap can be attributed to differences in variables but much less of its increase. The earnings situation of young women and women with limited education has especially deteriorated if compared to men having the same characteristics.
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Considerable effort has been exercised in estimating mean returns to education while carefully considering biases arising from unmeasured ability and measurement error. Recent work has investigated whether there are variations from the "mean" return to education across the population with mixed results. We use an instrumental variables estimator for quantile regression on a sample of twins to estimate an entire family of returns to education at different quantiles of the conditional distribution of wages while addressing simultaneity and measurement error biases. We test whether there is individual heterogeneity in returns to education and find that: more able individuals obtain more schooling perhaps due to lower marginal costs and/or higher marginal benefits of schooling and that higher ability individuals (those further to the right in the conditional distribution of wages) have higher returns to schooling consistent with a non-trivial interaction between schooling and unobserved abilities in the generation of earnings. The estimated returns are never lower than 9 percent and can be as high as 13 percent at the top of the conditional distribution of wages but they vary significantly only along the lower to middle quantiles. Our findings may have meaningful implications for the design of educational policies.
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In urban China the Household Income and Expenditure Survey requires respondents to keep a daily expenditure diary for a full 12-month period. This onerous reporting task makes it difficult to recruit households into the survey, compromising the representative nature of the sample. In this article we use data on the monthly expenditures of households from two urban areas of China to see if data collection short-cuts, such as extrapolating to annual totals from expenditure reports in only some months of the year, would harm the accuracy of annual expenditure, inequality and poverty estimates. Our results show that replacing 12-month diaries with simple extrapolations from either one, two, four or six months would cause a sharp increase in estimates of annual inequality and poverty. This finding also undermines international comparisons of inequality statistics because no country other than China uses such comprehensive 12-month expenditure records. But a corrected form of extrapolation, based on correlations between the same household’s expenditures in different months of the year, gives much smaller errors in estimates of inequality and poverty.
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We propose a method to decompose the changes in the wage distribution over a period of time in several factors contributing to those changes. The method is based on the estimation of marginal wage distributions consistent with a conditional distribution estimated by quantile regression as well as with any hypothesized distribution for the covariates. Comparing the marginal distributions implied by different distributions for the covariates, one is then able to perform counterfactual exercises. The proposed methodology enables the identification of the sources of the increased wage inequality observed in most countries. Specifically, it decomposes the changes in the wage distribution over a period of time into several factors contributing to those changes, namely by discriminating between changes in the characteristics of the working population and changes in the returns to these characteristics. We apply this methodology to Portuguese data for the period 1986-1995, and find that the observed increase in educational levels contributed decisively towards greater wage inequality. Copyright © 2005 John Wiley & Sons, Ltd.
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We introduce a new, integrated regression-based approach for decomposing inequality indices with household-level data, and we examine the strengths and weaknesses of inequality decompositions by income source in light of the way that they are commonly interpreted. The approach uses estimated income flows from variables in linear income equations to decompose aggregate inequality indices. The integrated approach provides an efficient and flexible way to quantify the roles of variables like education education, age, infrastructure, and social status in a multivariate context.
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Gender earnings differentials in urban China by region and their changes during the first decade of economic reform are examined. It is found that the female-male earnings ratio increased during the early stage of reform. The male earnings premium, overall, showed an increasing trend in the later stage of reform. Decomposition of the gender earnings differential reveals that a relatively lower percentage of the differential could be explained by gender differences in productive characteristics in the fast growing regions and in regions with a rapid pace of reform. The cross-sectional results highlight the possible existence of gender discrimination, particularly in the later stages of economic reform and development. Both market competition and the effects of wage decentralization play a role in shaping the gender earnings differentials. Gender earnings differentials varied by region and over time, generally in tandem with the pace of economic reform and development. The decomposition of the over time changes in the earnings gap indicated that improvement in the productive characteristics of females during the reform period constantly enhanced the earnings of females relative to those of males. The changes over time in the return to female characteristics, however, work to counter any narrowing of the gender earnings gap. Copyright © 2007 The Author; Journal compilation © International Association for Research in Income and Wealth 2007.
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A national urban household survey for China in 1986 is analyzed to examine the determinants and the extent of income inequality. The influence of age, education, occupation, ownership category, sex, region, and their various inter-relationships are studied. Estimates of income inequality among household heads are also made. By presenting a blend of institutional and statistical analysis, the emphasis throughout is placed on explanation. By international standard, the urban wage structure in China is extremely compressed. This reflects the egalitarian objectives and interventionist instruments of government. Yet in some of the results the Chinese employment system is found to mimic a labor market. Policy implications are drawn. Copyright 1991 by Blackwell Publishing Ltd
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In this paper, we examine the determinants of urban wages in China from 1988 to 2002. We find increased returns to education but a decrease in the returns to experience. The 2002 data imply that the widening pure gender gap and the growth in the premium to Communist Party membership may have come to an end. The reform of the state-owned enterprise (SOE) sector and the shift in industrial structure out of heavy industry is shown to impact wages of workers within those sectors. We use recall panel data for 1998 to 2002 to provide fixed effects estimates of the impact of sector ownership, Communist Party membership and unemployment on wages. Journal of Comparative Economics33 (4) (2005) 644–663.
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In urban China the Household Income and Expenditure Survey requires respondents to keep a daily expenditure diary for a full 12-month period. This onerous reporting task makes it difficult to recruit households into the survey, compromising the representative nature of the sample. In this article we use data on the monthly expenditures of households from two urban areas of China to see if data collection short-cuts, such as extrapolating to annual totals from expenditure reports in only some months of the year, would harm the accuracy of annual expenditure, inequality and poverty estimates. Our results show that replacing 12-month diaries with simple extrapolations from either one, two, four or six months would cause a sharp increase in estimates of annual inequality and poverty. This finding also undermines international comparisons of inequality statistics because no country other than China uses such comprehensive 12-month expenditure records. But a corrected form of extrapolation, based on correlations between the same household's expenditures in different months of the year, gives much smaller errors in estimates of inequality and poverty.
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We construct a tractable, flexible-functional-form estimator of cumulative distribution functions for non-negative random variables which admits large numbers of covariates. The estimator adopts and extends techniques from the spell-duration literature for estimating hazard functions to distribution functions for wages, earnings, and income. We apply these methods to investigate sources of wage inequality for full-time male workers between Canada and the United States, finding that the Canadian wage density has a thinner left tail because low-educated workers have higher pay and a thinner right tail because of a lower proportion of highly-educated workers. Unions appear to play a large role in these outcomes.
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Over the last fifteen years, many researchers have attempted to explain the determinants and changes of wage inequality. I propose a simple procedure to decompose changes in the distribution of wages or in other distributions into three factors: changes in regression coefficients; the distribution of covariates, and residuals. The procedure requires only estimating standard OLS regressions augmented by a logit or probit model. It can be extended by modelling residuals as a function of unmeasured skills and skill prices. Two empirical examples showing how the procedure works in practice are considered. In the first example, sources of differences in the wage distribution in Alberta and British Columbia are considered; in the second, sources of change in overall wage inequality in the United States, 1973–99, are re–examined. Finally, the proposed procedure is compared with existing procedures. JEL classification: J3 La décomposition des changements dans les distributions de salaires : une approche unifée. Au cours des quinze dernières années, nombre d’études se sont penchées sur les déterminants et les changements de la distribution des salaires. Ce mémoire propose une procédure pour décomposer les changements de la distribution des salaires en trois éléments: les changements dans les coefficients de régression, la distribution des regresseurs et les changements résiduels. Cette procédure ne nécessite que l’estimation de regressions par moindre carrés ordinaires et d’un modèle probit ou logit. L’auteur montre aussi comment modéliser les résidus en fonction de compétences non mesurées. La procédure proposée est mise en application dans le contexte de deux exemples: la distribution des salaires en Alberta et en Colombie–Britannique et les changements dans la distribution des salaires de 1973 à 1999 aux Etats–Unis. Le mémoire examine aussi comment cette procédure se compare aux méthodes proposées par d’autres chercheurs.
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Economic transition from a planned to a market oriented economy is often associated with a widening of income inequality. The nature of this change, however, may differ during different stages of the economic transition. This paper investigates the increase in income inequality in urban China during two phases of economic reform: a moderate reform era (1988-95) and a radical reform era (1995-99). It is found that although income inequality increased considerably during both stages, the nature and causes of the increase are different. In the moderate reform period, the increase in inequality was a result of some parts of society sharing more of the economic gain than others, and the main cause of this inequality is regional income dispersion. During the radical reform period income reductions at the lower end of the distribution is observed, and it is mainly due to the large-scale unemployment generated by labor reallocation. Copyright 2004 Blackwell Publishing Ltd.
The effect of transition on the distribution of income in China
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Gustafsson, B., & Li, S. (2001a). The effect of transition on the distribution of income in China. Economics of Transition, 9(3), 593–617.
China considers cap on salaries at state monopolies. China Daily Available online at http://www.chinadaily.com Glass ceiling or sticky floor? Examining the gender earnings differential across the earnings distribution in urban China
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China Daily (2010). China considers cap on salaries at state monopolies. China Daily, June 30. Available online at http://www.chinadaily.com.cn/china/2010-06/30/content_10037055.htm Chi, W., & Li, B. (2008). Glass ceiling or sticky floor? Examining the gender earnings differential across the earnings distribution in urban China, 1987–2004. Journal of Comparative Economics, 36, 243–264.
Rising wage inequality: The role of composition and prices. NBER working paper No.11628 Trends in U.S. wage inequality: Revising the revisionists
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Autor, D. H., Katz, L. F., & Kearney, M. S. (2005). Rising wage inequality: The role of composition and prices. NBER working paper No.11628. Autor, D. H., Katz, L. F., & Kearney, M. S. (2008). Trends in U.S. wage inequality: Revising the revisionists. The Review of Economics and Statistics, 90(2), 300–323.