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Main Problems and New Trends of Income Distribution in the Transformation Phase

Aug 14,2017

By Feng Wenmeng, Zhang Liang & Ge Yanfeng

Research Report Vol.19 No.4, 2017

Proper income distribution not only has a bearing on social harmony, stability and sustainable development, but also is crucial to economic transformation. On the demand side, a higher income level and proper income distribution can provide solid consumption support for economic development. On the supply side, a higher income level can improve people’s lives in such aspects as education and health, thus providing a better human capital base for economic development.

I. Basic Problems in the Field of Income Distribution

In recent years, the government has paid growing attention to income distribution, and rolled out policies on the reform of income distribution, which to some extent have improved the distribution of income. On the whole, however, there are still a number of prominent problems in the field of income distribution that deserve great attention. At present, the basic problems are mainly reflected in three aspects.

First, the income gap is still big. According to data released by the National Bureau of Statistics, the Gini coefficient of China’s household income declined from the historical high of 0.491 in 2008 to 0.465 in 2016, yet that was still much higher than the internationally recognized warning level of 0.4. Some scholars believe that the actual number is even higher. Meanwhile, the wealth gap among residents is even more pronounced. Due to the imperfect wealth statistics, there is still no authoritative data to measure the wealth gap in the country. However, some studies indicate that the Gini coefficient of household wealth in China has probably exceeded 0.7. This shows that the wide gaps in income and wealth have not been changed fundamentally. Now and for some time to come, addressing the problems in income distribution and building a sound pattern of income distribution will remain an important task.

Second, the olive-shaped distribution pattern is far from being achieved. The olive-shaped distribution pattern centered on the middle-income group is the best of social income distribution patterns. The Third Plenary Session of the 18th CPC Central Committee set the goal of building an olive-shaped distribution pattern. The Fifth Plenary Session of the 18th CPC Central Committee and the 13th Five-Year Plan again emphasized the concrete measures for attaining this goal. After years of hard work, the pattern of income distribution in our country has gradually shifted from the “inverted nail-shaped” pattern to pyramid-shaped patterns. However, there is still a long way to go to achieve the olive-shaped income distribution pattern. Overall, in the current income distribution pattern, the lower-middle-income group still makes up a majority, and the middle-income group is not full-fledged.

Third, social mobility has decreased, and the risks of class solidification are growing. Since the reform and opening up, with a gradual relaxation of control, social mobility as a whole has been greatly improved in China. A large number of rural labor forces have migrated to urban areas to work in non-agricultural sectors, and the younger generation, through education, has an employment structure totally different from that of the generation before them. On the whole, social mobility has gradually increased with economic and social progress. However, since the beginning of the 21st century, due to some new factors, social mobility has been edging down and the risks of class solidification gradually increasing. This can be reflected in the decreasing proportion of rural students in key universities in recent years and the “competition of family background” phenomenon in the employment market.

It should be noted is that although the income gap has been on an upward trend since the reform and opening up, it has shown distinctive characteristics in different stages. Before the 1990s, though the income gap was widening, the income of all groups in the society increased. In contrast, changes in income gap have shown characteristics of polarization in recent years: the income of the high-income group is growing at a faster pace, while that of the majority is growing slowly, and some groups even see a decrease in their income.

As the Chinese economy is shifting from high rate of growth to medium-high rate of growth, the general improvement in people’s livelihood based on rapid development is hard to continue, and many problems underlying the rapid growth will come to surface or become more pronounced. In the stage of economic transformation, properly handling the problems in income distribution is a prerequisite for fostering new drives of economic growth, ensuring social harmony and stability, and building a sound development pattern, and is also necessary for ensuring smooth economic transformation.

II. Main Causes of the Widening of Income Gap

The continuous widening of the income gap after the reform and opening up is related to the low share of work remuneration in primary distribution, and also to the limited role of tax and social security in redistribution. In addition, many imperfections in the distribution order have also led to the widening of the income gap. Some factors that lead to the widening of the income gap are rational reasons, such as the stage of development of our country, the differences in historical conditions, and market competition, and others are irrational, such as institutional maladies, imperfect guarantee mechanisms, rent-seeking, and corruption.

Work remuneration generally makes up a low share in primary distribution. In 2015, worker remuneration accounted for 47.9% of the national income, much lower than the 55% in the world’s major developed economies. This is both related to the stage of development of our country and to the imperfections of the labor market system. In recent years, despite the “shortage of migrant workers” in some coastal areas, the total labor supply in our country as a whole remains excessive, which determines that the factor of capital still holds a comparative advantage in income distribution. At the same time, the imperfect employment system, the insufficient protection of worker rights and interests, and the existence of institutional discrimination constitute practical obstacles to workers’ access to reasonable income in the labor market.

The imperfect taxation and social security systems have affected the regulating rule of redistribution in income distribution. As to taxation, the deficiencies in tax types, unreasonable setting of tax rates, and the incomplete scope of taxpayers deter taxation from playing a full role in regulating income distribution. In terms of social security, issues such as the reverse order of the covered groups, fragmentation of institutional design, and lack of protection for low-income groups have undermined the role of social security in reducing the income gap in primary distribution, and in some cases even widened the existing gap, leading to the “reverse transfer” effect.

Corruption, rent-seeking, gray income and many other malpractices also impede the formation of a reasonable pattern of income distribution. In some areas, enough attention has not been given to the formulation of industry standards and regulatory measures in the process of introducing market-based mechanisms. In other areas, the improper handling of how to effectively combine socialism and market economy has led to the unclear boundary between the government and the market. As a result, the government fails to fulfill their due responsibility, while the market-based mechanisms fail to bring their role into full play. These give rise to corruption, rent-seeking, gray income, and other factors that affect the rational order of income distribution.


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