The Trend and Mechanism of Intergenerational Income Mobility in China: An Analysis from the Perspective of Human Capital, Social Capital and Wealth

• Author: Chen Lin,Yuan Zhigang
• DOI: http://doi.org/10.1111/twec.12043
• Published date: 01 July 2013
• Date: 01 July 2013

The Trend and Mechanism of

Intergenerational Income Mobility in

China: An Analysis from the Perspective

of Human Capital, Social Capital and

Wealth

Yuan Zhigang

1

and Chen Lin

2

1

School of Economics, Fudan University, Shanghai, China and

2

Department of Social Sciences, Fudan

University, Shanghai, China

1. INTRODUCTION

INTERGENERATIONAL income mobility is the extent to which children’s income

depends on their parents. The increasing of intergenerational income mobility can relieve

the social pressure caused by the income gap and provide the incentive for hardworking and

human capital investment. As is shown by some studies, while the income inequality caused

by differences in individual talent and effort is generally tolerable by the public, the income

inequality caused by uncontrollable factors such as family background will bring about strong

redistributive preference (Piketty, 1995; Benabou and Ok, 2001).

Recently, the widening of income gap has become an important issue perplexing Chinese

economic and social development. The central government also emphasises the significance

of income equality relative to economic growth in many circumstances. At the same time, the

success of the Chinese economy in overcoming the middle-income trap, realising industrial

upgrading and sustained growth in the global competition also hinges on the accumulation of

high-qualified human capital. All these make the research on intergenerational income mobil-

ity necessary and significant for current Chinese society.

However, relevant research in China is still in its infancy. First, there is no consensus on

the trend of the intergenerational income mobility in recent years in China. On the one hand,

the phenomenon of inheritance of wealth and position has become a hot issue in both the pub-

lic press and academic fields (Hongbin, 2011). On the other hand, classic sociological social

mobility research suggests that a society will tend to be more mobile during the process of

industrialisation and marketisation (Blau and Duncan, 1967).

Second, current empirical analysis also gets different results, with the estimated intergener-

ational elasticity varying from 0.2 to 0.8 (Haigang, 2005; Xianguo and Liqiu, 2006; Ying,

2009; Gong et al., 2010). This broad range of estimation mainly stems from different ways of

constructing income variables and different sample selection processes. We try to base our

research in this paper on a more clearly defined income variable and a more careful data man-

agement process, which we believe will lead to a more precise estimate of the mobility trend.

The details will be described in Section 3.

Third, there is very few analysis on the mechanism of the intergenerational income mobility

in China, which is quite important for the understanding of a given mobility level and relevant

The World Economy (2013)

doi: 10.1111/twec.12043

Ó2013 John Wiley & Sons Ltd

880

The World Economy

public policy designing. Ruilong (2010) proves the importance of father’s political resources by

finding a significant impact of father’s Communist Party of China (CPC) membership on chil-

dren’s income before father’s retirement. Congbin and Weifang (2009) point out the important

role of education. Xianguo and Liqiu (2006) calculate the contribution of education, health and

occupation, with the total explanation power reaching only 19 per cent.

What is the trend and mechanism of the intergenerational income mobility in China?

This paper seeks to answer these questions by using the microdata from CHIPS (1988–

2002) and Chinese General Social Survey (CGSS) (2006). The remaining paper is

constructed as follows: Section 2 will briefly review relevant research, Section 3 will intro-

duce the data and the empirical methods, Section 4 will report the main empirical results,

Section 5 will give more discussion on the role of wealth, and Section 6 concludes.

2. RELEVANT LITERATURE

The empirical estimation on intergenerational income mobility is generally based on the

following ‘Galton-Becker-Solon equation’:

ychild

i¼~

aþ~

byfather

iþ~

ei:ð1Þ

ychild

iis the log of child’s lifetime income of family i.yfather

iis the log of father’s lifetime

income of family i. All incomes are the demeaned value after controlling for both father’s

and child’s age and square of age, as well as children’s gender. ~

bis the intergenerational

income elasticity (IGE) measuring the income mobility. The higher the IGE is, the lower the

income mobility is.

As ~

eiincludes many factors that relate to yfather

i, such as the ability and health of the father,

the estimated ~

bcan only be interpreted as the general correlation between father’s and chil-

dren’s income, instead of being explained causally. Although it is pointed out by relevant the-

oretical analysis that genetic inheritance and human capital investment is the key to the

intergenerational income correlation (Becker and Tomes, 1979; Solon, 2004), the complex

endogeneity makes it very difficult to get the causality conclusion (Solon, 1999; Sandra and

Devereux, 2011).

Various attempts have been made trying to get the causal coefficient during the past dec-

ade, the methods of which can be classified into three categories. The first one is to distin-

guish the genetic factors from the environmental factors by using the income data of various

kinds of siblings, such as twins and adoptees (Bjorklund et al., 2005, 2006). The second one

is to identify the impact of income by using exogenous income shocks such as the tax reduc-

tion and subsidy programme (Morris et al., 2004; Dahl and Lochner, 2005). The third one is

to identify the importance of different intermediate variables by using statistical and empirical

decomposition (Bowles and Gintis, 2002; Blanden et al., 2007).

As data availability restricts the application of the first two methods in China, this paper

uses the third one to study the mechanism of the intergenerational income mobility in China.

More exactly, we follow the general method of Blanden et al. (2007) and choose human capi-

tal, social capital and wealth as the main intermediate variables because our understanding of

the Chinese society suggests they should be very important in the intergenerational income

transmission in China. The following results prove this hypothesis, which we believe is a

quite interesting and important finding that should be given special attention in the current

economic and social development of China.

Ó2013 John Wiley & Sons Ltd

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