Primary Distribution, Top Incomes and Inequality in China, 1978-2007

Most analyses explain the increase in China's overall inequality during the reform period principally by means of the expansion of urban-rural income gap. This paper tries to shed light on a more complex relationship that appears to exist between primary distribution of income, top incomes share, and the Gini index. This relationship is mediated by the same urban-rural disequalizing mechanism existing in the Chinese economy, which is based on the hukou system. After presenting the main theoretical contributions that clarify the general relationship among those three variables, we describe that mechanism which has connected them in China during three last decades. As we shall see, there exists a link between the relative impoverishment of Chinese peasants, the consequent flow of rural-urban migration, its depressive effect on industrial wages, the resulting increase in the profits’ share, and rising top incomes. The enrichment of urban top income households seems to drive the rise in the urban-rural gap, while labour’s loss of share in national income ultimately accounts for the overall increase in the Gini index. The paper ends with a reflection on the ability of the latest policy measures taken by the Chinese government to reverse this pattern of inequality during the current global economic crisis.