Understanding the Kuznets Process-An Empirical Investigation of Income Inequality in China: 1978-2011

This paper investigates income inequality in post-reform China using both national time series and provincial panel data from 1978 to 2011. We identify a Kuznets inverted-U relationship between economic development and income inequality and show that this relationship was driven by the process of urbanization. We estimate that the Kuznets turning point occurred in the mid-1980s, and argue that increased urbanization after the mid-1980s had the effect of narrowing income inequality but its effect was more than offset by other factors. In particular, we found that low productivity in agriculture relative to that of the economy as a whole (i.e., dualism) and inflation were significant contributing factors to income inequality. We also present evidence to suggest that secondary education and higher education may have different effects on income inequality at the national level and at the provincial level.