Decomposition of Changes in Earnings Inequality in China: A Distributional Approach

Using the nationwide household data, this study examines the changes in the Chinese urban income distributions from 1987 to 1996 and from 1996 to 2004, and investigates the causes of these changes. The Oaxaca-Blinder decomposition method is applied to decomposing the mean earnings increases, and the Firpo-Fortin-Lemieux method based upon a recentered influence function is used to decompose the changes in the income distribution and the inequality measures such as the variance and the 10-90 ratio. The decomposition results show that the wage structure effects such as the widened gender pay gap, the increasing return to college education, and the widened gap in the return to different industries, ownership, and regions, have contributed to most of the overall increases in income inequality. During the different time periods, 1987-1996 and 1996-2004, the impacts of these factors vary at the different points (e.g. the lower half or upper half) of distribution.