Income Disparity in China

The following sections are included:

• PREFACE
• CONTENTS

• Since the 1990s, the degree of inequality in China has increased and has become more serious. Therefore, more attention should be given to eradicating this problem.
• The income distribution gap among Chinese residents is mainly reflected in three aspects, namely, the income gap between urban and rural residents, the income gap among residents in different regions, and the income gap among all classes of society. The growth rate of income differs among Chinese residents according to six combinations of geography, city, and countryside.
• Narrowing the geographical gap mainly corresponds to the government's investment policy. The geographical gap will not become severe as long as the people are given the freedom to migrate. The mobility of the labor force can effectively narrow the geographical gap.
• Narrowing the income gap among all classes of society mainly corresponds to the government tax and transfer payment policies. By strengthening its tax reforms, transfer payments, and social security system, the government will be reaching out to the poor and bridge the gap between the rich and the poor among all classes of society.
• Employment is another solution to bridge the gap between urban and rural areas. The poorest people in China are not the low-income workers in the cities but the unemployed peasants in the countryside. Therefore, the only way to modernize the rural areas is to quickly shift the surplus rural labor to the manufacturing and service industries in the urban areas.
• The Gini coefficient measures the income gap between the wealthy groups in the eastern cities and the destitute groups in the western rural areas. Among many factors, the gap between urban and rural areas is the main reason for the increase in China's Gini coefficient.
• In recent years, the gap between the rich and the poor neither has gone beyond the warning line nor expanded significantly. Therefore, the Chinese society could continue to maintain the basic social stability structure.
• The Gini coefficient has its limitations. First, the Gini coefficient does not have much of a relationship with economic development. Second, it has no relationship with people's living standards. Third, the change in the Gini coefficient is not necessarily related to social stability.

• According to data predictions in 2008, China is expected to experience the Lewis turning point in about 14–18 years. It is anticipated that labor market unrests will precede the occurrence of this Lewis turning point. Therefore, the solution to provide employment to the entire Chinese labor requires prolonged efforts. Never take gossip to heart or treat the arduous reform task lightly.
• In 2011, the proportion of agricultural employment was 29.5% in China, whereas that of industrialized countries was about 35.7%. Based on this parallel comparison it can be deduced that China may not have reached the Lewis turning point during this period.
• As improving total output is difficult, if rural population continues to increase, the income of farmers may decline. Thus, the option is to encourage gradual migration of the rural surplus labor force to urban areas. Can the average income of farmers increase by such a move?
• Farmers conduct business and seek jobs in cities because of the income gap between urban and rural areas. As average income in rural areas is significantly lower than the lowest income in the city, much labor is transferred from agriculture to manufacturing and service industries. Although a large number of labor are transferred, agricultural output remains unchanged, and the average income of farmers increases because of the large number of rural surplus labor.
• According to the relative variation law of the marginal productivity of labor and labor price, the assertion that the Lewis turning point has been reached or is approaching is ill grounded.
• The large increase in wage level in some areas does not necessarily mean that no surplus labor exists in rural areas.
• Recently, instead of narrowing, the income gap between unskilled and skilled workers has widened, which does not support the judgment that the labor market has reached or is approaching the Lewis turning point.

• The standard definition of surplus labor is the marginal product of labor, which is zero.
• The results from a horizontal comparison of the proportion of the agricultural labor force in other countries in the world do not support the assumption that rural surplus labor does not exist in China.
• Surplus rural labor may remain in some eastern areas, but the situation in the western rural areas is completely different. The situation does not reflect the entire facet of surplus labor.
• According to the average production efficiency in rural areas, enabling all rural laborers to pursue full-time work could reduce at least 150 to 200 million laborers without affecting the total output of the agricultural products. The rural labor productivity will improve gradually, and the surplus rural labor may be overestimated with progresses in agricultural mechanization.
• Optimistically, rural surplus labor requires at least 14 to 18 years to be completely exhausted. Achieving successful migration of rural surplus labor is a tremendous historical task and should be treated with utmost caution. The solution cannot be achieved in a short period.

• Price is the soul of the market. As long as the market mechanism plays its role, both labor shortage and high unemployment will adjust after a period of time.
• Surplus labor and people leaving their hometowns to work in cities are two different concepts that should not be confused with each other. If the government can help farmers overcome difficulties and avoid problems arising from the system construction, liberating more surplus labor from the countryside is possible.
• Labor shortage may arise due to two factors. First, rural areas may not have surplus labor to migrate to cities. Second, enterprises may not pay more wages to employ workers. If rural areas have surplus labor and enterprises are wealthy, will the phenomenon of labor shortage occur?
• The situation is different depending on the place. Indeed, the rural areas of the Pearl River Delta and the Yangtze River Delta have no surplus labor; however, hundreds of millions of surplus laborers urgently require migration in the rural western area.
• Labor-intensive industries find increasing the wages of employees difficult because of their small profits. Lower profitability and increased wages may impact technological development of such industries.

• Industrial transfer is an inevitable rule in which the economy grows. Industrial upgrading could be likened to a process of metabolism, self development, and self-improvement. Only by accelerating the industrial upgrading, can the economy achieve full vitality.
• After the Second World War, the United States became the major manufacturing hub of labor-intensive products for 10 years, Japan for about 20 years, the four Asian economic giants for 20 years, and Mainland China for almost 30 years. Thus, it is time for industrial transfer again.
• The destination of the fourth manufacturing hub of labor-intensive products depends on market competition. The country that possesses more advantages in producing labor-intensive products with low wages and high labor productivity will be the final winner.
• Aside from the per unit labor cost, the transfer cost should also be considered. When other conditions are similar, the cost of transferring within the economy is lower than that of transferring abroad.
• Industrial transfer is the result of global competition. Determining which country will be the final winner depends on the next round of competition. Opportunity favors only the prepared mind.

• Residents' consumption levels have not decreased. The reason for the reduced proportion of residents' consumption in the GDP is the sharp increase in government investment.
• Residents' consumption is not a controlled variable. Therefore, a system has been engineered to increase their consumption levels. Such a system works by focusing on increasing the output, reducing the tax burden, and improving the social security system, so that the residents can be stimulated to increase their consumption. If, on the other hand, the residents are simply urged to increase consumption without a comprehensive reform arrangement, consumption will not increase.
• Practice has proved that government subsidy has little effect on stimulating domestic demand.
• The increasing tendency of consumption is not a concern. According to the theory of economic growth stages, as long as China enters the later period of economic takeoff, its consumption level will rise rapidly.
• The drinker's heart is not in the cup, so to speak. This adage highlights that the core of advocating the expansion of domestic demand is to increase wages, which caters to populist thought.
• Domestic demand and consumption depend on the market. Excessive government intervention, such as forcefully setting the minimum wage, increasing worker wages, and taking rise in income as the standard for performance evaluation, may worsen matters.

• Two reasons contribute to China's high savings rate. First, as the social security system has not been perfected, people worry about life in retirement, medical care, and children's education and conserve money. Given the soaring housing price, many people have to scrimp and save to increase savings and buy a house. Second, China is in the economic takeoff stage. Given the effect of the first generation, the high savings ratio is an inevitable phenomenon at this stage, completely conforming to the law of economic development.
• The savings rate commonly rises first and then drops when poor countries catch up with rich ones. A long gap occurs between the rising and the falling, during which the savings rate maintains a high level with minimum effect on the fluctuations of other variables. According to Rostow's theory of economic growth, the stage of high savings ratio can be regarded as the drive-to-maturity stage.
• No country in the world can maintain high savings rate for a long time. The high savings rate usually lasts for 20 to 25 years.
• The main reason for high savings rate is the consumption effect of the first generation. A man's consumption habit is formed in his youth with a significant inertia. The first generation in the economic takeoff period maintains a high savings rate. As the young generation gradually starts work, the high savings rate certainly comes to an end. The savings rate falls with the increase in per capita income and finally reaches the level of developed countries.
• The drive-to-maturity stage of China started in 1987. Based on the experiences of South Korea and Chinese Taipei, China's high savings rate could last up to 2015 to 2020.

• According to statistical data, the residents' income and consumption have been increasing faster than the GDP in recent years. However, the figures do not support the assumption that the proportion of the labor compensation in the GDP declines.
• According to the survey, there are three major reasons that contribute to the declining proportion of labor compensation, namely, change in the statistical rules, change in the industrial structure, and adjustment of the GDP statistical data. Among them, the change in statistical rules is the main reason for the sharp decline in labor compensation of the GDP. Henceforth, the modified statistical rules since 2004 have included the individual owner's compensation into the capital gains, thus significantly reducing the proportion of the labor compensation in the GDP.
• Assuming that if the individual owner's income was included in the labor compensation, then the proportion of the labor compensation in the GDP would have been 40.1% in 1992 and would have increased to 43.5% in 2008.
• After the adjustment of the GDP data in 2005, the GDP increased by 2.3 trillion yuan. The increase in the denominator resulted in the declining proportion of the labor compensation in the GDP.
• Based on the international horizontal comparison, the proportion of the labor compensation in the GDP in China is far greater than that of developing countries. In fact, China ranks first among the moderately developed countries in this aspect.
• Assuming that none of the good competition mechanisms, systematic obstacles, information screen in the labor market, and the monopoly of some large enterprises or illegal mandatory gangland exist, the wage level must conform to the social welfare and the labor benefits.

• With a large number of farmers migrating to cities in search of jobs, theoretically, the gap between urban and rural areas should be narrow. However, the statistical data show that the gap has been gradually widening since 1985 and that the disposable income gap between urban and rural residents has expanded to about 3.33 times after 2003, which reflects the sharp contradiction between theory and statistics.
• According to the current statistical principle, if the incomes of such migrating farmers are included in that of the urban residents based on the place of residence, will it mean that as more farm workers earn in the cities, the gap will become wider between urban and rural areas?
• The income of a farm worker who migrates alone without his family should be included in that of the rural areas. According to the sample survey of the National Bureau of Statistics, the total income of farm workers is computed by multiplying their monthly salaries by the number of farm workers migrating alone to urban areas. Then, this amount is deducted from the total income of the urban residents and included in the income of rural residents. After this adjustment, the rural per capita income increases significantly and the income gap between urban and rural areas falls from 3.33 to 2.4 times.
• In recent years, the gap between urban and rural areas has gradually narrowed in general, although the gap remains wide. This conclusion conforms to both people's intuition and the basic theory of economics.
• Correcting the statistical data does not mean that the severity of the gap between urban and rural areas can be ignored.
• In recent years, the policies that encourage the transfer of the rural surplus labor force to narrow the gap between urban and rural areas have been found to be effective. Only the continuing encouragement to transfer the rural surplus labor force can narrow the income gap between urban and rural areas effectively.

• The minimum wage law is the result of game and competition among various social forces. Politicians are fond of addressing the minimum wage law the most. As a result, they are followed by labor unions and news media.
• Western countries have their reasons for establishing the minimum wage law, but the result may be opposite if the experience of Western countries is applied automatically to China. Many of China's industries are labor intensive, with a high elastic labor supply curve and a large number of rural surplus labor. In this case, improving the minimum wage may deprive the farm workers of employment opportunities.
• The time and standard of establishing the minimum wage law should be considered carefully. If the minimum wage is less than the balanced wage in the market, establishing the minimumwage will be unnecessary. If the minimum wage is too high that it affects the operation of the enterprises, it will discourage enterprises from creating employment opportunities and thus negatively affecting the poorest people.
• If the minimum wage continues to increase when a large number of surplus rural labor exists, the minimum wage will cater to the requirements of the masses superficially but will violate the rules of economic development in reality, which is unfavorable to the migration of agricultural labor force and the progress of industrialization and urbanization.
• The primary task is to suspend the minimum wage increase and do whatever is possible to transfer the farmers from the traditional small scale peasant economy and have them engaged in modern industries. First, check whether the government's rules and regulations discriminate against farm workers. Second, provide farm workers with enough employment information. Third, enable the farm workers to vote with their feet. The farm workers will quit their jobs any time if they are paid low salaries. Fourth, provide migrating farm workers with necessary social security, such as solving the issues of temporary residences, their children's education, and healthcare.

• According to the negative slope of the fitted line, the United States, Canada, and China have no population trap, but India, Algeria, Angola, and other countries may have.
• China's population fitted line has a positive slope without the population trap, and the disturbance of the population is gradually smaller. After the population peak, as long as employment opportunities are expanded continuously, China's employment pressure may ease with the decrease in the new employment population.
• Continuing the one-child policy may bring a number of adverse consequences. As the population ages, the social security burden of the working population may become increasingly heavier. Although the labor shortage is not a real threat at present, continuing the family planning policy may eventually lead to labor shortage. Therefore, it is time to reexamine the family planning policy and make appropriate adjustments to it.
• The demographic dividend is a favorable condition for economic growth. If the labor resources cannot be fully utilized during this period, the demographic dividend will gradually disappear.
• The demographic dividend is neither a necessary condition nor a sufficient condition for economic growth. Without sufficient employment opportunities, the demographic dividend is merely a castle in the air.

• The distribution mechanism has three levels: primary, secondary, and tertiary. The primary distribution mainly occurs in the production and resource allocation process; the second level mainly occurs in the tax and transfer payment link; and the third refers to charities, donations, and so on.
• Some policymakers tend to focus more on the primary distribution and try to bridge the gap between the rich and the poor by increasing the wages and the proportion of the labor remuneration in the GDP ignoring the second level of distribution.
• It is necessary to emphasize efficiency in production and fairness in distribution. Hence, the key to realizing fairness in production and resource allocation is to oppose monopolization, improve the legal system, and ensure the fair treatment of enterprises under different types of ownership.
• If the market mechanism can fulfill its function, discussing what the reasonable wage is will be unnecessary. Any wage rate that is beneficial is reasonable.
• The main responsibility of bridging the gap between the rich and the poor should rest with the second distribution. The government's revenues should not only meet public needs but also adjust the gap between the rich and the poor through the tax levy and transfer payment.
• China's tax reform lags behind the standard reforms in economic development and other fields, which must be the root cause of the widening gap between the rich and the poor. Only a comprehensive tax reform can effectively reduce this gap.
• The objective of the tax reform is to gradually adjust the tax structure and transfer part of the enterprise income tax and the indirect tax transfer to personal income tax, which can effectively promote national economic development, increase social investment, boost the government's tax income, and ultimately narrow the gap between the rich and the poor through the progressive tax system without increasing the enterprise burden or reducing the living standards of workers.
• It is necessary to enhance the local government's implementation of the transfer payment and improve the public welfare facilities by levying real property tax and helping low-income families. Moreover, levying real property tax enables the public to share the benefit of the real estate (including land) appreciation, which is helpful in promoting social justice.

• After 2008, money supply in China has greatly exceeded the GDP growth rate. Hence, with substantial amounts of money in the market, inflationary pressures will increase.
• Given the spread of populism, the call for increasing wages and benefits has become stronger. After the wage increases, instead of spending more money, the people will deposit their cash in banks, which will result in the creation of a large dammed lake of financial resources within a short period.
• The balance of residents' savings deposits would continue to increase like rain falling into the dammed lake. The concern is where the new deposits will flow to if they do not enter the dammed lake. More importantly, what should be done if the water in the dammed lake overflows?
• The monthly income of residents accounts for a total of 2.5 trillion yuan, including about 1.5 trillion yuan for consumption, 500 billion yuan for investment, and 500 billion yuan for bank deposits. This condition is unstable. The key to influence the capital flow is the bank's interest rate. If the bank pays a negative interest rate on savings deposits, the money placed in the bank will be reduced and will even flow out. If it flows into the real estate market, the housing price will likely soar; and if it flows into the consumer market, the consumer price index (CPI) will likely jump.
• The US government issued more notes after the sub prime mortgage crisis in 2008, which could trigger runaway inflation. Once the prices of energy and raw materials in the international market soar, the price increase will likely be transferred to China and may drive up CPI and other price indices. Therefore, it is necessary to prevent transmitted inflation.
• Under the pressure of international inflation and the expectation of an RMB appreciation, a large amount of idle money may flow into China. The foreign capital inflows mainly affect the real estate market in the coastal cities, especially the high-grade commercial housing. If the housing price is strictly limited to increase even with certain measures such as the purchase limit, the main economic goals will likely be lost in favor of small gains once the idle money is introduced into the commodity market, which will lead to a price increase. Therefore, the general economic plan will be disrupted.
• Given a choice between two evils, the lesser one should be taken. If the capital flow changes, it is better that the real estate market be affected instead of the commodity market. In other words, a better approach is to start from the real estate market.
• Despite financial storms, China has not encountered a financial crisis in the real sense. China is more likely to encounter a financial crisis with the reform and opening up.

• The trade union movement under the banner of populism has led Latin America astray. Contrary to the expectations of the vast majority of workers, not only has the economy of Latin America developed very slowly, but it also has the widest gap between the rich and poor in the world. Clearly, populism is one main reason for the backwardness of Latin American countries.
• Populism exaggeratedly regards the material appeals of the petty bourgeois as public opinion and promises to increase the wages of the public and improve their welfare to gain votes. This method never fails. Even if some politicians see through populism, they go along with it and flaunt the banner of populism. Conversely, the rational politicians and economists are neglected, misunderstood, or rejected.
• As populism pursues immediate welfare and lacks compromise and compatibility, the wound of history is repeatedly opened.
• The cheap promises of populism easily win public support, but fulfilling these promises are difficult. The public is not easily outwitted. The public can be cheated once or twice but not for all time. Once the threshold is reached, populism will destroy itself.
• Populists are shortsighted. The third path advocated by Perón and his followers does not hold water. Too eager to please the petty bourgeois, the populists did not prioritize the development of production or set up a reasonable tax and transfer payment method to take care of the poor through the legal system. From the perspective of historical facts, production efficiency did not increase and social justice was not realized in places where populism flourished.

• The wide gap between the rich and the poor divided Thailand into two retaliatory groups, namely, the red-shirt and yellow-shirt armies that pushed themselves to the frontlines of conflict.
• The emerging industrial group, with Thaksin as the representative, chose the strategy of uniting with the grassroots people to fight against the strong conservative group.
• In the face of traditional force, which integrated the military, the court, and the council altogether, the so-called “votes decide everything” was only a wishful thinking.
• If only initiatives were taken to bridge the gap between the rich and the poor in the economic development process, the Thai people would have remained united and the society would have refrained from divisions.
• When the society is divided into two opposing groups, no space is available for democratic politics.
• With an aim to create a peaceful society balanced development should be implemented between the city and the countryside and between the central and remote areas as much as possible. Particularly, special attention must be given to vulnerable groups.

• Populism aims to please the petty bourgeois, pursue immediate interests, and neglect the long-term interests of the society. Populism neither wants to search for the truth nor cares about the facts but instead agitates the desire for the Utopian dream.
• Repeatedly frustrated by impractical claims, the people gradually assimilated the practice of looking backward and going to extremes to a certain degree. For populism to spread, there must be hostility toward the rich, the officials, foreigners, and knowledge.
• Populism lacks a core value. The discontent of the people constitutes the shell of populism, and into what state it will develop depends on the ideas inside the shell. These ideas largely form the standard of the success of reforms. If populism spreads, then there must be something wrong with the policies. These policies should stress development and not disregard equality in the process of economic transformation.
• The two ways to bridge the gap between the rich and the poor, depending on the market and relying on the government, are clearly different. The “invisible hand” and the “visible hand” are similar to two sides of a coin, neither of which can be ignored.
• The role of the government is important, but the fundamental action required is to emancipate the productive forces and arouse enthusiasm to promote economic development. A correct incentive mechanism is then required to be implemented in a fair competitive environment. In the economic development process, the most important function of the government should be to create and ensure a fair and competitive environment through systems, laws, and other measures.
• The urgent task is to bridge the gap between the rich and the poor. The government should work as a good referee to encourage fair competition instead of directly intervening in it. If market mechanisms cannot play their normal role, then the government should work on the development of the system and promote competition. Government intervention in the market mechanism when it is working normally may cause more problems.

The following sections are included:

• REFERENCES
• INDEX