explicitly unemployed. In addition, the number of household who had a secondary occupation was associated with higher household income in 2004, but not in 1989, which suggests that moonlighting plays a more important role.

The results of Table 5 show that, in rural areas, households whose members work in state-owned firms and urban private firms have higher income than those whose members work in collective units, household firms and other. Households that mainly rely on farming have lower income. And their income gap increased over time. As expected, the amount of household farm-land has positive impacts on income. Many researches show that non-farm activity plays a more and more important role in rural income (FAO, 1998). Our results suggest that households working on small handicraft or commercial business have significantly higher income.

The income level of urban households in coastal provinces is higher than that in inland provinces, others being equal. The advantages of a household locating in urban Liaoning, Jiangsu and Shandong are significant in 1989 and 2004, and increase in importance over time. In particular rural households in Jiangsu province has significantly higher income, probably thanks to the beneficial effects of proximity to Shanghai and the prosperity of non-farm activities.

# **6.2. Decomposing Income Growth**

We apply the Oaxaca method to decompose income growth between 1989 and 2004 into changes in the stocks of education, occupation and other factors, and changes in the returns to these characteristics, using the estimations of Table 5. Table 6 summarized the main effect and year effect of various factors for urban areas.<sup>9</sup> The results suggest that returns to education increased drastically during that period. About two thirds of urban real household per capita income changes between 1989 and 2004 can be attributed to year effects of education, namely returns to education. The economic reform led to unleashing of market forces that promote efficient reallocation of resources. Workers can self-select through their own comparative advantages into jobs that value their particular attributes. The higher returns to skills in China simply reflect the increasing demand for skills from globalization and technology, as in other open economies. As employment rate dropped in 2004, the main effect of occupation composition was negative. The effects of the changes in returns to occupation, i.e. the year effects, explain about one third of total change in income variation, which becomes the second major source of income increase. In other words, during the period of 1989-2004, the share of higher-paid jobs increased.

**Table 6 – Decomposition of per capita income growth between 1989 and 2004**

<u>(urban area)</u>

||Total|Educ|Co<br>ation|ntribution<br>Occup|ofvarious <br>ation|variables t<br>Secon<br>occup|oincome <br>dary<br>ation|growth<br>Province||
|---|---|---|---|---|---|---|---|---|---|
||growth in<br>logarithm|Main<br>effect|Year<br>effect|Main<br>effect|Year<br>effect|Main<br>effect|Year<br>effect|fixed<br>effect|Others<br>factors|
|Effect|0.673|0.027|0.438|-0.079|0.218|-0.002|0.009|0.019|0.044|
|Percentage|100.0|4.1|65.1|-11.8|32.4|-0.3|1.3|2.8|6.5|

> 9 As CHNS is a longitudinal survey, most household characteristics are unchanged.

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