Revisiting Income Inequality in China from an Evolving Productivity Perspective

Zhang Lei (张磊)1,2*

1Business School, Xiangtan University, Xiangtan, China

2Research Center for Socialist Economic Theories, Xiangtan University

Abstract: Income inequality in China has evolved substantially amid rising productivity since reform and opening up in the late 1970s. Based on the group decomposition equation for Gini coefficient, this paper estimates China’s inequality possibility frontier (IPF) and the inequality extraction rate (IER). Results indicate that: (i) From 1978 to 2017, China’s IPF continuously expanded amid improving productivity, and the maximum feasible Gini coefficient rose from 0.2281 to 0.8446. (ii) Meanwhile, China’s overall IER decreased from 123% to 55%. More specifically, China’s IER fell sharply over the period 1978-1980, stabilized in the period from the mid-1980s to 2012, and further declined after the 18th CPC National Congress in 2012. Currently, 55% of China’s maximum feasible inequality has been converted into actual inequality. The correlation between inequality and productivity is recognized in academia but seldom explored in the literature. To fill this void, this paper empirically measures inequality in light of productivity development. Our research conclusions explain why yawning income gaps in China have been tolerated since reform and opening up, and offer empirical evidence for setting income distribution policies according to economic development in the new era.

Keywords: maximum feasible inequality, inequality possibility frontier (IPF), inequality extraction rate (IER), tolerable inequality

JEL Classification Codes: N3, O15

DOI: 10.19602/j.chinaeconomist.2021.03.04