Measuring Income Composition Inequality in China

This paper investigates household disposable income composition inequality in China from 2010 to 2018. We utilize five waves of the China Household Finance Survey (CHFS) and compute the Income Factor Concentration (IFC) index a la Ranaldi (2022). Our analysis reveals high levels of household income inequality (measured by the Gini coefficient) throughout the study period, though showing a decline from 0.74 (2010) to 0.55 (2018). Meanwhile, income composition inequality, the IFC index, remained high, ranging from 0.47 to a high of 0.67. Although the overall capital income share remained modest (varying from 13% to 22%), it was disproportionately held by rich households, indicating a significant concentration of capital income at the top of the income ladder.
Further investigation at the provincial level (29 provinces) sheds light on the connection between income inequality and income composition inequality. Our key findings are fourfold. (1) Provinces with higher income composition inequality also exhibited higher overall income inequality. (2) Capital income share matters: A larger share of capital income contributed more significantly to overall income inequality. (3) In most provinces, the top 5% high-income households held a dominant share (40%-60%) of total capital income, highlighting significant concentration. (4) Income level is not a clear driver: We did not observe a clear association between a province's average income level and its income inequality or income composition inequality.