Informal employment and its effect on the income distribution in urban China

Article history: Received 7 February 2014 Received in revised form 27 July 2014 Accepted 28 July 2014 Available online 5 August 2014 This paper discusses the issue of informal employment and its effect on the income distribution in China using datasets from the China Urban Labour Surveys of 2005 and 2010. Based on a new definition of informal employment, we estimated the proportion of informal employment relative to total non-agricultural employment in urban China and found it to be 49.7% in 2005 and 40.3% in 2010. Meanwhile, our study illustrated that informal employees' earnings were 67% that of formal employees, and this large earnings gap raised the Gini coefficient to 0.42 in 2005. The Blinder–Oaxaca decomposition result shows that the earnings gap explains more than half of the overall personal income inequality in urban China. These results indicate that informal employment has a significant effect on the income distribution in urban China. Consequently, regulating the labourmarket, eliminating jobdiscriminations and legislating the informal employment should be considered as alternative means of reducing inequality in China. © 2014 Elsevier Inc. All rights reserved. JEL classification: D31 J31 P25 O15 O17 R23