Using new household survey data for 1995 and 2002, we investigate the size of China’s
urban-rural income gap, the gap’s contribution to overall inequality in China, and the
factors underlying the gap. Our analysis improves on past estimates by using a fuller
measure of income, adjusting for spatial price differences and including migrants. Our
methods include inequality decomposition by population subgroup and the OaxacaBlinder
decomposition. Several key findings emerge. First, the adjustments substantially
reduce China’s urban-rural income gap and its contribution to inequality. Nevertheless,
the gap remains large and has increased somewhat over time. Second, after controlling
for household characteristics, location of residence remains the most important factor
underlying the urban-rural income gap. The only household characteristic that
contributes substantially to the gap is education. Differences in the endowments of, and
returns to, other household characteristics such as family size and composition,
landholdings, and communist party membership are relatively unimportant.