Factor Decomposition of Rural Regional Income Inequality Changes in China
中国农村居民收入区域差异变化的因子解析

This paper focuses on the changes of rural regional income inequality and attempts to decompose them into different component factors based on Gini index. A new method is proposed to decompose the influence of each factor on inequality changes into its structure effects and its real inequality effects. In order to explore the factors behind the changes in rural income inequality in China, the overall rural income inequality is decomposed into contributions by different income sources: wages, household operations, properties, and transfers. This analysis is only for the period of 1993-2005 due to a serious data difference before 1993. Application of the method to China's rural regional inequality in the period 1993-2005 reveals that household operations still represents the dominant source of rural income although its influence on rural inequality is decreasing. In recent years, with the decline of household operation concentration index and its percentage share, it had positive effects in reducing the total regional inequality. Although wage income only accounts for some 26%-40% of the total disposable income, its contribution to the overall income inequality ranges from 43% to 50%. This implies that the wage income played the most important role in China's rural regional income inequality. However, for the changes of rural inequality, the contribution percentage of the wage component did not display any upward trend although its absolute share in the total income increased straightly. There is no strong evidence to show that wage income enlarge rural regional income inequality. On contrast, regional concentration in wage income did help reduce total regional income inequality since the mid-1990s. The contribution of wages income in raising regional inequality mainly comes from income share increase. These increases are a direct consequence of development process of urbanization and industrialization. In the future, as long as the concentration decline effects continue to exceed the share increase effect, wage must contain positive effects in reducing overall income inequality. Thus, to promote industrialization and urbanization in less developed areas and encourage farmers to gain more wages from local enterprises and outgoing employment would be one of the important approaches in reducing rural regional inequality.In recent five years, the role played by properties and transfers in rural income inequality increased fast and steadily. However, these two components have different influence manner. The increasing contribution from properties is mainly due to the increase of its share. As to the transfer income influence, the increase of its share enlarged rural income inequality, but the evident decline of its concentration reduced regional inequality. Therefore, more financial transfer and social services from the central government to less developed areas would be more and more effective in tackling rural regional inequality in China.