Reexamining the income inequality in China: Evidence from sequential panel selection method

This study aims to understand whether incomes across different regions in China are converging or diverging. We propose a novel approach to panel unit root testing–sequential panel selection method (SPSM) by using panel Kapetanios et al. (KSS) test with a Fourier function, which is sufficiently efficient to control for structural breaks and nonlinearity as well as cross-sectional dependency. SPSM classifies the whole panel into a group of stationary and nonstationary series. The method also clearly determines how many and which series in the panel are stationary processes. Using the panel data obtained from 31 regions in China, we find out that the real gross domestic product per capita from 1979 to 2010 does not converge in 20 of the 31 regions in China. The evidence of income divergence has important policy implications for China.