College Expansion, Shrinking State-owned Enterprises, and the Rise of Income Inequality in Urban China, 2003-2010.

Income inequality in urban China has experienced a dramatic growth during the last decade. Between 2003 and 2010, the variance of log income among the working population climbed from 0.66 to 0.88, amounting to a 33% increase. In the meantime, the composition of the urban labor force was considerably reshaped by college expansion, shrinkage of state-owned enterprises, and a surge of rural-to-urban migration. By explicitly taking into account these institutional and demographic changes, this article attempts to adjudicate between six competing explanations for the recent rise in income inequality: (1) widening regional disparities, (2) increasing returns to education, (3) expansion of tertiary education, (4) shrinkage of state-owned enterprises, (5) rural-to-urban migration, and (6) growing residual inequality. Using both ANOVA-based decompositions and a parametric approach recently developed by Western and Bloome (2009), I decompose the total change in inequality into four detailed components: essential change in between-group inequality, essential change in within-group inequality, dispersion effect, and transfer effect. The counterfactual analyses show that over two thirds of the growth in income inequality during the sample period can be explained by compositional changes in individual and contextual characteristics. In particular, the bulk of this composition effect stems from college expansion and the shrinking employment of state-owned enterprises. [ABSTRACT FROM AUTHOR]