Impact of non-farm income on inequality and poverty: the case of rural China

Nong Zhu, Institut National de la Recherche Scientifique (CIED)
Xubei Luo

Based on data from the Living Standards Measurement Surveys, we examine the effects of non-farm income on inequality and poverty in rural China using two approaches. Firstly, we consider non-farm income as an “exogenous transfer”, which adds to the total household income, and study the contribution of different types of income on inequality using the decomposition of the Gini index. Secondly, we consider non-farm income as a “potential substitute” for other household earnings, and compare the distribution of the simulated income in the absence of non-farm activities with that of the observed income to examine the impact of participation in non-farm activities on inequality and on poverty. We find that, the prosperity of the non-farm sector after the economic reform alleviates rural inequality and poverty. It increases the income levels of the poorest households and reduces the income gaps between poor households.