Urbanization and Income Inequality in China: An Empirical Investigation at Provincial Level

Trends in inequality in China suggest that there has been a significant increase in inequality in the distribution of income from around 0.30 in 1980 to 0.55 in 2012. Research over the last two decades has focused on identifying the main drivers of the increase in inequality. The main objective of this paper is to examine the relationship between urbanization and income inequality in China using provincial level data over the period 1987–2010. Using a panel of data for 20 provinces collected from the Chinese Statistical Yearbooks for five selected years. The empirical analysis based on OLS, fixed and random effects models, show a robust inverted-U relationship between inequality and urbanization. A threshold rate of urbanization of 0.53 has been identified with the implication that provinces with levels of urbanization higher than the threshold will experience reductions in income inequality. The second objective of the paper investigates the role of urbanization and the rural–urban wage differential on provincial inequality. Based on data from a representative cross-section of six provinces covering the period 1987–2005, we find that well-developed or income rich regions tend to have lower rural–urban inequality and higher migrant inflows and the rural–urban wage gap make significant contributions to income inequality.