Incomes have risen dramatically in China over the past three decades, albeit from a very low base. What distinguishes the trends in income growth and inequality in China from the rest of the world?  

The data. The researchers rely on data from two nationwide household surveys: the China Household Income Project (CHIP), conducted in 1988, 1995, 2002, 2007, and 2013, and the China Family Panel Studies (CFPS), conducted every two years since 2010. Both CHIP and CFPS are nationally representative household surveys that provide information on demographics, education, employment, income, sources of income, and household assets and expenditures. The researchers primarily use the first wave of CHIP data from 1988 and the most recent wave of CFPS data from 2018 in their analyses. 

Researchers then construct a nationally representative sample of working-age individuals between 16 and 64 for a total of 58,952 individuals from the 1988 CHIP sample and 27,627 individuals from the 2018 CFPS sample. Finally, they calculate individual-level income before taxes and government transfers from 1988 to 2018 to determine how income inequality has changed over time. Pre-tax income includes labor income (including wage income, income from self-employment, private business and farm, and pension benefits), capital income (including income from rental properties, interest, dividends, and capital gains), and other income (including gifts from friends or relatives).  

Per capita income growth in China

Faster income growth among top earners drives rising inequality. Researchers find that China’s income growth, in the shape of a classic hockey stick, stays mostly flat across the entire income spectrum with a moderate positive slope before sharply spiking upward. The very affluent have experienced faster income growth over the past three decades compared to those in the lower income percentile. Individuals in the top 5% saw their average income grow at an annual rate of 8.9%, and those in the top 0.1% saw a staggering 12% annual growth in income, which equates to a 30-fold increase in their income between 1988 and 2018. Growth opportunities were strongly tilted toward the very upper end of the income scale.

Despite the widening inequality, however, both the middle class and even the poor also experienced remarkably rapid income growth. For a median adult in the income distribution, the annual growth rate (7%) resulted in an income eight times larger over the 30 years. Individuals in the bottom 10% experienced a 5% annual growth in their income, or a four-fold increase.  

International comparisons reveal China’s relatively high absolute income growth. Apart from France, top earners in the U.S. and Russia have also experienced significantly faster income growth over the last 30 years. However, for a median adult in the income distribution in China, the annual growth rate is six to seven percentage points higher compared to his or her counterpart in France, U.S., and Russia. An even more remarkable difference is observed for individuals at the bottom of the income distribution in China: the income growth rate of the bottom 5% of earners was 4.9% in China, surpassing the income growth rate of the fastest-growing group in the U.S., which was 3% per year for the top 0.001% of earners. 

Per capita income growth in China, Russia, the U.S., and France

Income growth attributed to labor income, not capital income. By examining the income composition of individuals within the top decile, the researchers find that labor income accounted for approximately 90% of their total income, reflecting significant gains in China’s human capital. These findings corroborate the relatively limited role of capital income compared to labor income among top earners in China: on average, the rates of return on capital for the top income groups were consistently below 1%. 

Government distribution does little to address inequality. The growth rates of income after taxes and government transfers for most of the population did not significantly differ from the growth rates of income before taxes and government transfers. The disparity becomes noticeable only for those in the bottom 20% of earners or in the top 20% of earners, though the overall disparity is relatively small (at less than one percentage point per year). Specifically, redistribution results in a reduction of the top income decile’s share by only 4% in China, relative to 25% in France and 19% in the U.S. Additionally, redistribution leads to an increase in the bottom 50% income share by 6% in China, relative to 52% in France and 53% in the U.S. These findings underscore the relatively limited impact of government redistribution in addressing inequality in China. 

Assessing the implications of rising inequality. Researchers highlight the rapid increase in income inequality in China from 1988 to 2018, primarily driven by substantial income growth among individuals at the top, as opposed to stagnant or declining incomes among those at the bottom. Individuals at the very bottom of the income distribution simultaneously experienced remarkable absolute real income growth in China. When the poor also experience absolute gains, the researchers suggest, high income inequality may be more tolerable. However, when overall economic growth stagnates, policymakers should take note as societal tolerance for growing inequality may wane.