Income Mobility, Income Inequality And Social Welfare Of Urban And Rural Households In China

With the increasing income inequality, Income inequality become a hot topic in China.Many researches have been devoted into this issue.Gini coefficient is a frequently-used index to calculate the income inequality, but the calculation of Gini coefficient is based on the cross-section data, so it only reflects the income inequality at a time point. Since the individual in the income pecking order changes over time, only if we analyse the income mobility of individual, we can clearly understand the changes of long term income inequality.This paper analyses the changes of Income inequality in China from income mobility view, we find the increase of Gini coefficient in china is related to the reshuffling of individual in the income pecking order. This finding explains the paradox of why did the Gini coefficient increase with the income growth to have been pro-poor in China. The difference of changes in Gini coefficient between rural areas and urban areas in china reflect a pattern of either progressive income growth being offset by significant income pecking order reranking. Although the Gini coefficient is higher in rural areas, the income growth in rural was more pro-poor than urban. Since the negative effect of increasing income inequality on social welfare, the increase of social welfare was less than the mean income increased in the past 20 years.The main conclusions of this paper are as follows:1. From year 1989 to 2004, the upward income mobility of rural low-income households was quicker than the low-income households in urban areas; but the downward income mobility of rural high-income households was slower than the high-income households in urban areas. Both of the absolute income mobility and the relative income mobility of rural households were quicker than urban households in each period between 1989 and 2004. Furthermore the trends of income mobility in urban and rural household were different in the past 20 years.2. The growth rates of different household groups from low-income group to high-income group decreased layer by layer in rural and urban areas.The income mobility of rural and urban households alleviated the long term income inequality in each period between 1989 and 2004, but the income growth in rural areas was more pro-poor in China. Thus, while the Gini coefficient is higher in rural areas, but in fact compared to urban areas, the income growth in rural areas was more conducive to alleviate the long-term income inequality, the income growth in rural areas was more pro-poor income growth.3. We find the increase of Gini coefficient in rural and urban China is related to the rapid income mobility. Since the rapid income mobility, the increase of Gini coefficient didn't mean the long term income inequality increased in the past 20 years.This finding explains the paradox of why did the Gini coefficient increase with the income growth to have been pro-poor in China. China's economy is growing rapidly, while the income distribution is dramatic changing.The rapid income mobility has a great influence on the income inequality. The difference of changes in Gini coefficient between rural areas and urban areas in china reflect a pattern of either progressive income growth being offset by significant income pecking order reranking. Although the Gini coefficient is higher in rural areas, the income growth in rural was more pro-poor than urban.4. Household Socioeconomic Characters have significant effect on household income mobility. Besides the family strcture, household human capital and social status have positive effect on the household income mobility.5. If societes are averse to income inequality, from a social welfare perspective, whether the growth in incomes can offset the increase in income inequality depend on the judgement about society's value and, in particular, about the weight placed on income inequality in the expression of society's welfare.We find unambigiguous increases in social well-being for rural households where the strong rise in incomes clearly offsets the relatively small increases in income inequality.Among urban households, the strong increase in incomes were adequate to compensate for increases in income inequality only when society exhibits low level of aversion to income inequality.The last chapter concludes with policy suggestions, including deepening the reform of the income distribution policy,rasing the the income of low-income families, improving social security system development and the standard of personal income tax, accelerating the equalization of income distribution.