July 2021

IZA DP No. 14535: Self-Employment in Rural China: Its Development, Characteristics, and Relation to Income

forthcoming in: China & World Economy

The changes in the employment structure in rural China are studied with a focus on off farm self-employment. Data from the China Household Income Project surveys covering the same 14 provinces from 1988 to 2018 are used. We find that the proportion of adults in rural China with self-employment as their primary form of off-farm employment increased from only 2 percent in 1988 to 11 percent in 2013, with no further increases through 2018. In 1988 and 1995, the rate of self-employment was highest in the eastern region, but thereafter, this regional pattern disappeared. The probability of being self-employed in rural China was higher among married males than among unmarried persons. Having had a migration experience increases the probability of being self-employed. We also report that since 1995, self-employed households have a higher average income than other categories of households. Based on estimates of income functions, we conclude that the income premium from being self-employed increased rapidly from 1988 to 1995 to become remarkably large when only a few adults were self-employed. However, as a larger fraction of the rural population has entered self-employment, the payoff from being self-employed has rapidly diminished, although in 2018, it was nevertheless still substantial.