December 2007

IZA DP No. 3270: Earnings Instability and Earnings Inequality in Urban China: 1989–2006

This paper investigates the evolution of earnings inequality in urban China from 1989 to 2006. After decomposing the variance of log of earnings into transitory and permanent two parts, we find that both components are important contributors to the total variance of earnings. We also find that the share of the transitory part has been decreasing from early 1990 to 2004; however, this decreasing trend is reversed from 2004 to 2006. Compared female to male, though these two populations share similar trends in the changes of transitory and permanent components, changes are more pronounced for female than for male. Our results suggest that the time-invariant part and time related part in permanent earnings are negatively correlated. This implies converge of earnings profile in long run and also implies that there is more mobility within the distribution of long-term earnings.