As Kuznets taught, urbanization induced by industrialization usually increases inequality of developing countries in the early stage of development; as countries industrialize more, inequality will keep rising till a turning point and decline afterwards. Does China follow the similar trajectory as Kuznets curve depicts? Where does China stand in this curve?

The paper aims at answering these questions by offering a unique look of how pay inequality has evolved in China during the reform period. Using group components of Theil’s T statistics with province and sector as groups, we seek to provide some new evidence of China’s rising inequality during the reform period. According to our findings, since early 1990s China began to see a sharp rising tendency of income inequality across the country. Much of the rise can be attributed to relative gains of a few eastern coastal provinces and metropolitan cities, like Beijing, Shanghai, and Guangzhou. Within these regions, inequality is even more dramatic than the rural-urban gaps. During 1990s both between-province inequality and between-sector inequality have increased. However, entering 2000s these two dimensions have diverged. Inequality between provinces peaked early in the decade and declined after 2001. In contrast, inequality between-sector continued rising till 2009. Since 2009 the overall pay inequality has declined steadily. The decline of overall pay inequality is attributable to the decline of both between-province inequality and between-sector inequality. The decline of inequality could be caused by many factors. One of popular hypotheses is that the global crisis has extremely hit China’s developed regions, the development of which have mostly relied upon high-wage sectors, such as Finance and Insurance, Real Estate and Public Administration. That has led to the narrowing regional disparity and sectoral gap. However, are there any other factors that should be considered?

In March 2014, the new administration unveiled its landmark urbanization plan for 2014 to 2020, according to which advancing urbanization has been repackaged as a crucial tool to combat China’s rising inequality (i.e. the inequality between rich and poor in cities and rural-urban gap across the country).  As Kuznets indicates, urbanization usually serves as a primary driver of inequality in developing countries during the early stage of industrialization. Therefore, the government’s current move toward larger scale of urbanization along with the decline of China’s inequality after 2009 has aroused our great interests in exploring the hypothesis that China may reach the tippling point of Kuznets curve.