How Aging and Intergeneration Disparity Influence Consumption Inequality in China

• DOI: http://doi.org/10.1111/j.1749-124X.2014.12069.x
• Date: 01 May 2014
• Author: Jing Xiang,Juwei Zhang
• Published date: 01 May 2014

79

China & World Economy / 79–100, Vol. 22, No. 3, 2014

©2014 Institute of World Economics and Politics, Chinese Academy of Social Sciences

How Aging and Intergeneration Disparity Influence

Consumption Inequality in China

Juwei Zhang, Jing Xiang*

Abstract

Concurrent with market economic reforms, China is facing an increasing income gap and

an aging population. The question addressed in the present paper is how much aging

contributes to the rising disparity in consumption. Based on the model established by Ohtake

and Saito (1998), our study shows that cohort effects contribute close to 60 percent of the

rising consumption inequality, while approximately 10 percent is the result of aging. The

growth of aggregate consumption inequality caused by the cohort effect has various

implications. Strengthening the redistribution system, especially the tax system, may enable

the economy to avoid further increases in income inequality.

Key words: aging, inequality, intergenerational disparity

JEL codes: D30, D90, J11

I. Introduction

During the period 1978 to 2012, China experienced unprecedented economic growth, with

an average annual growth rate of 14.5 percent. However, during the same period, income

inequality also increased. The Gini coefficient increased from 0.412 in 2000 to 0.474 in 2012,

up by more than 15 percentage points (NBS, 2013), and it increased more than 64 percent

from the 1981 figure of 0.288 (World Bank, 1997).1 The growing income inequality might

impact social stability and have serious adverse impacts on China’s long-term economic

development (Wan et al., 2006; Zhang and Cheng, 2013).

Now, when it comes to studying income inequality, not only social phenomena, such

*Juwei Zhang, Professor, Institution of Population and Labor Economics, Chinese Academy of Social Sciences,

Beijing, China. Email: zhangjw@cass.org.cn; Jing Xiang, Post-doctorate, Institute of Population and Labor

Economics, Chinese Academy of Social Sciences, Beijing, China. Email: xiangjing19850726@126.com. The paper is

supported by the China Postdoctoral Science Foundation (Grant No. 2013M530837).

1The earliest study to estimate the Gini coefficient in China was conducted by the World Bank in the1983, and they

reported that the Chinese Gini coefficient was 0.33 in 1979.

80 Juwei Zhang, Jing Xiang / 79–100, Vol. 22, No. 3, 2014

©2014 Institute of World Economics and Politics, Chinese Academy of Social Sciences

as second-generation wealth inherited from their parents, cannot be ignored, but also the

impacts of intergenerational gaps on inequality are causing increasing concern. As Becker

and Tomes (1986) point out, vertical income inequality (e.g. intergenerational inequalities)

deserves more attention than horizontal inequality (e.g. between urban and rural areas).

Wang (2005) shows that, to a large extent, the social and economic status of younger

generations depends on elder generations’ resources (Golley and Kong, 2013). The income

elasticities of parents and children of low-income families are more interconnected than

what is the case for better-off families, and the intergenerational mobility of low-income

families is modest. More and more evidence is showing that social classes in China are

beginning to form (Cai, 2011); economic growth is leading to the income growth gap

increasing more for the young generation than the old. Fan et al. (2013) point out that the

decrease in intergenerational mobility is driven by increases in both returns to human

capital and educational costs. One more year of parent schooling can result in additional 0.37

years schooling for children born during 1975–1979, compared to 0.33 for those born

during 1965–1969. Furthermore, intergenerational income elasticity increased from 0.32 for

cohorts born before 1970 to 0.44 for cohorts born afterwards.

These findings imply that income inequality will continue to increase among younger

generations in China, ceteris paribus, if no policies are introduced to mitigate intergenerational

inequality. If intergenerational mobility decreases constantly, inequality among young

people will be sustained and enlarged. Therefore, an important reason for considering

intergenerational gaps as a key cause of inequality is that people born in different periods

are not commensurable categories.

However, how intergenerational inequality is estimated will have an impact on aggregate

income inequality because income combined with age generally takes the form of a pyramid

when experience plays a significant role in wages and income. For example, as the average

income of people in their 50s is higher than that of those in their 30s, speculating on income

inequality is not straightforward because work experience/age is an important explanatory

variable contributing to income growth. The shifts in aggregate income inequality are

linked to intergenerational disparities.

Over the past 30 years, the Chinese labor market has opened up considerably;

industrialization and urbanization have been gradually enhanced; and the financial market

has been developed and improved. These external institutional changes provide everyone

with opportunities to improve their standard of living. However, with differing growth rates

of income and wealth among individuals in the labor market, inequalities between cohorts

will widen. Those inequalities will be passed on to the younger generation by the elder

generation, and gaps between younger generations will widen even more. Together with

the rapid development of the Chinese economy during the past 30 years, inequalities have