Nonagricultural Employment Determinants and Income Inequality Decomposition

Nonagricultural income has become an important source of rural household income in China and has brought about wide inequality in rural areas. This paper investigates the determinants of nonagricultural employment and income and how they contribute to income inequality using the China Household Income Project (CHIP) 2002 survey data and a three-step decomposition approach. Our results indicate that educational inequality accounts for 9 percent and 36 percent, respectively, of wage and self-employment income inequality, implying that educational inequality plays a substantial role in nonagricultural income inequality. The results also show that community characteristics explain much inequality in wage and self-employment income, indicating that local development is important in the determination of nonagricultural income inequality.