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Analysis the Logic Relationship between Income Inequality and the Rates of Return to Education in China’s Urban Areas

Author: LiuHua
Tutor: ZhongFuNing
School: Nanjing Agricultural College
Course: Agricultural Economics and Management
Keywords: Income Inequality the Rates of Return to Education in Urban Areas Product Demand Diversity Product Demand Differentiation Factor Demand Differentiation
CLC: F123
Type: PhD thesis
Year: 2006
Downloads: 1241
Quote: 3
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Abstract


Economists have great interesting in the relationship between economy development and income inequality for a long time, and have not yet claimed to be the unambiguous conclusion. Many correlative theories and empirical studies indicate that economy development and income increasing don’t mean diminishing income inequality. Economic reforms have brought about spectacular growth and vast improvement of the people’s living standards in China. However, income inequality has been expanding relatively as well. All of the countries on the transfer state suffer for the fact that income inequality is expanding, in which China is the most serious country. It is surveyed that Gini coefficient of China in 2002 is 0.454, which has gone beyond the exemplary line 0.4.As far as the theory of human capital is concerned, there is an agreement that human capital play an important role in individual income and income distribution, and that the general average education degree and education distribution of citizens have an effect on income distribution. Take China for example, certain studies have been approved that the structure changes in the rates of return to education could strongly explain income inequality. Therefore, in order to solve income inequality, it is necessary to make clear the changing trends of the rates of return to education and its structure, and the factors and mechanism that influence the rates of return to education. These researches help that we could give government efficient suggestion about income inequality. Meanwhile, the attention to the change of the rates of return to education in the long term could help us to further understand income inequality. Because of regarding the rates of return to education as a criterion to the labor market, it is important for making policies of income distribution and employment and education to research the change of the rates of return to education in the long term.Some previous studies mainly focus that education have the causal effects on income, that is to say, why heterogeneity labor forces have different income. These documents obtained great achievement on correlative theories and been offered important suggestions for the policy reform of education. However, it is not enough to analysis income inequality that we analysis the effect of education on income inequality only from the supply-side. In fact, the changes of factors demand have an effect on income inequality and on the relationship between education and income. As economy rapidly increasing, new produces and even new occupations have been surged universally, which stimulate the increasing demand for the high-skilled labor market. Meantime, the low-skilled labor market has been saturated overly. Therefore, income inequality in different level labor market might expand rapidly and even over the equilibrium level. In that case, income inequality may be consolidated by itself through the demand of products and factors.This paper analysis the tendency of the rates of return to education, and mainly examine the structure changes of income and the rates of return to education in different education level, and explore why they have changed, and in which condition income inequality could be strengthened by itself. The analytic frame of this paper is that: income inequality—product demand diversity and product demand differentiation—factor demand diversity and factor demand differentiation—factor price differentiation—income inequality. There are five main parts in this thesis, shown as the followings:Part 1: to establish the theoretical analytic frame of the logic relationship between income inequality and the rates of return to education.From demand-side, this paper particularly analyses the changes of consumers’ and manufactures’ behaviors grounded on income inequality, and theoretical demonstrated the inherent mechanism in which income inequality affect the comparative price of factors. On the basis of this theoretical analytic frame, the hypotheses have been put forward just as follows:Hypothesis 1: As the increasing of the people’s income standards and income inequality, product demand has the characteristic of diversity and differentiation.Hypothesis 2: Product supply has the characteristic of diversity and differentiation, accompanying with income inequality and product demand diversity and product demand differentiation.Hypothesis 3: Because of the effect on product diversity and product differentiation, the demand of factors have the characteristic of diversity and differentiation. On the condition that the supply structure of factors have not been changed, or been slowly changed, the structure of factors price have been changed, factors price inequality is becoming serious.Part 2: to analyze the tendency of the rates of return to education in China’s urban areas.In this part, we summarize the previous studies to understand the Mince model and to provide econometric methodology. Using CHNS time-series data, we estimate the tendency of the general rates of return to education and its structure. The results indicate that while the general income level raise, income inequality in different educational level have the tendency of expanding. While the general rates of return to education goes up, the rates of return to education inequality in different educational level have been gradually inclined to expanding.Part 3: to examine the effect of income inequality on product consumption diversity and product consumption differentiation.In this part, the first chain of the analytic frame referred above is to be proved. And the hypothesis 1 is to be validated in both theoretical and empirical studies. In the empirical test, we use the evidences from macro-data and micro-data.The previous theories tell us that consumers prefer to purchase different kinds of commodities and the customers with high-income prefer to buy high-price commodities. These theories prove that increasing income and income inequality cause product consumption diversity and product consumption differentiation. Using macro-data, this paper inspect the changes of the consumption level and its structure, and portray income inequality and consumption quantity inequality and consumption price inequality from 1986 to 2004. Using the micro-data from household survey, this paper go further to study income inequality have the influences on consumption quantity inequality and consumption price inequality, and the long-term trend of the influences, and answer the questions whether and to what extent income inequality affect product consumption diversify and product consumption differentiation. The basic conclusion is that income inequaltiy positively affect product consumption diversity and product consumption differentiation, that is to say, income inequality would result in product demand diversity and product demand differentiation.Part 4: to research the effects of income inequality on product supply diversity and product supply differentiation. How do firms correspond to the changes of product demand? Whether do product demand diversity and product demand differentiation finally lead to product supply diversity and product supply differentiation under the market equilibrium? In this part, we try to analyze the structure of product supply response to the structure changes of product demand from the firms’ level. We then theoretically argue that the finns have the supply motive when product demand is diversified and differentiated, and thus find product supply have the characteristic of diversity and differentiation. Meanwhile, we empirically testify the existence of product supply diversity and product supply differentiation with the data collected from the product market, and validate the hypothesis 2 effectively.Part5: to research the effect of product differentiation on factor differentiation.This part theoretically and empirically analyze that product differentiation have some effects on factor differentiation, and mainly verify hypothesis 3. Firstly, from the factor demand function theory, we demonstrate the existence of the second chain of the analytic frame and the condition of existence, and infer that the structure change of product price lead to the structure change of factor demand. The results testify that steel price inequality and wage inequality and the rates of return to education inequality have the tendency of expansion. Consumption expenditure inequality has positive effect on income inequality and the rates of return to education inequality.

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