Changes in income inequality and welfare under economic transition: evidence from urban China

The paper examines the changes in income inequality and welfare in urban China from 1981 to 1999. While the Lorenz curves estimated using Kakwani's interpolation method indicate that the level of income inequality in urban China has increased significantly since 1981, welfare comparisons based on generalized Lorenz curves suggest that the rise in real average income has more than compensated for the increase in inequality and has therefore brought about continuous improvement in welfare since 1981, except in 1988 and 1989 due to high inflation rates. Nevertheless, it is becoming very critical for China to develop welfare programmes and a social security system to provide a guaranteed living standard for low-income households.