Education and Income Inequality in China

27 Feb

Despite increasing national income and growth the level of inequality within China has dramatically increased. A key factor contributing towards this trend is the unequal pattern of education. The Nationalist (Guomindang) Party began investing in education in 1927; the beginning of the peaceful “Nanjing decade” and industrialisation where ‘seeds of fruitful growth were sown’ (Naughton, p.43, 2007). China’s socialist past means that in recent years it has generated benefits from a relatively broad-based education system. However China is only recently emerging from extreme poverty and therefore as a country still has inadequate human capital and relatively low levels of education.

Within China income growth has been faster among urban households in coastal regions and slowest among rural households in western and northern regions. Therefore although Chinese society has become better off in recent years, as household incomes ‘more than quintupled between 1978 and 2004’ (Naughton, p.210, 2007), the benefits are unequally spread. The pattern of education throughout China follows the dualistic pattern of income distribution. Ideally the returns to education should be based on productivity therefore equivalent across rural and urban areas. Education has a positive impact on productivity and therefore can act as an instrumental variable to test the relationship between productivity and income.  Although the socialist regime pre reform era provided a basic level of education for the population as a whole, at the end of the planned economy period (in the late 1970s and early 1980s) researchers found that incomes were not consistently higher among individuals with more education (Naughton, p.192, 2007).

The Chinese government has devoted substantial resources to aid geographic development, such as the Western Development Program which allows for factors such as more school teachers in rural villages (Naughton, p.216, 2007). However government funds are limited. In 2005 Simon Kunznets  predicted that economic growth ‘would ripple out to most of the economy’ (Naughton, p.219, 2007) yet China’s huge size and geographic diversity means that ‘incomes are concentrated in fast-growing coastal cities’ (Naughton, p.219, 2007). For this reason the impact of economic growth has benefited those in urban areas substantially more. Increasing incomes in urban areas means that opportunities for education are greater in cities where Chinese workers have a higher ability to pay. Before the market reform in China the rate of return to education was limited and therefore income equality was greater. Yet after the reform era ‘residents have increasingly been differentiated between those who possess the capital, skills, and opportunities to benefit from the new economy and those who do not possess the requisite capital and skills’ (Naughton, p.219, 2007).

‘Only 20% of China’s working-age population has a high school education’ (Naughton, p.195, 2007), compared to 84% in the US. The vast size of China also means that government funding is limited, with spending on education approximately 3% of GDP, considerably lower than other comparable economies. Resources are not available for universal education, consequently ‘the gap in teacher preparation and quality of facilities between rural and urban areas is enormous’ (Naughton, p.197, 2007). Therefore although returns to education have increased since the 1970s, within a more market economy rural workers with limited access to education will struggle in China’s ‘increasingly skill-intensive economy’ (Naughton, p.195, 2007).

To conclude a large proportion of inequality within China is caused by wage differentials resulting from disparate levels of education. Individual levels of education within developing economies such as China depend on income and a worker’s ability to invest in human capital. This ability differs dualistically across the urban-rural divide due to different returns to education within each sector. Therefore whilst those workers benefiting from China’s economic growth get richer and invest more in education, rural workers and those unable to afford human capital investment struggle to escape relative poverty. Education is therefore shown to contribute towards income inequality more today since China has moved away from its socialist regime towards a market economic structure. Overall China’s educational structure is representative of a developing country. For instance ‘more than twice as many girls as boys do not go to school’ (Naughton, p.198, 2007) and the children of city migrants often cannot afford education as households bare most of the costs. Therefore although there has been increasing returns to education in recent years, different ability to pay between households means that education today still remains a contribution factor of income inequality.

Amy Warwick


Naughton, B. (2007). The Chinese Economy: transitions and growth. The MIT Press.

Ning, G. 2010. Can Educational Expansion Improve Income Inequality in China? Evidence from the CHNS 1997 and 2006 Data. IZA DP No.5148.


One Response to “Education and Income Inequality in China”

  1. hd10g11 February 28, 2014 at 11:35 am #

    Since the late 1980’s to the late 1990’s changes in poverty trends can be attributed to to proximate causes; income growths and shifts in income distribution with rural poverty increasing in the second half of the 1990’s (Zhang and Wan, 2006)

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