Income Inequality, Family Formation and Generational Mobility in Urban China

Income inequality has increased in most developed and developing economies in the world in the last 30 years and China is exemplary in this regard. Many analyses of its strident growth in income inequality have focused on the effects of policies relating to Urban-Rural and Inland-Coastal distinctions. Yet income inequality growth has prevailed on both sides of those respective divides as though there is something more fundamental underlying the phenomenon. Here, by showing how specific types of change in family formation and specific types of human capital transfer engender increases in inequality measures, growth in urban inequality is rationalized as a consequence of the changing nature of the family and the structure of the human capital augmentation process that has been a feature of the last 70 years in China. Influenced by such events as the Cultural Revolution, the One Child Policy and the Economic Reforms, people changed the way they chose a marriage partner, invested in children and passed on human capital endowments. Social class designations became less important and educational class designations became more important. Using a unique data set linking grandparents, parents and children, such changes can be observed empirically.