category, respectively, it is not possible to explicitly separate total income earned by being a cadre from other incomes.<sup>26</sup> Nonetheless, it is important to examine whether the income gap between cadre and non-cadre households is simply driven by an employment contract. To do this, we examine the difference in local wage income between cadre and non-cadre households by source.<sup>27</sup> Specifically, given the design of the 1986-1991 waves of the RCRE survey, we are able to disaggregate local wage income into three components: (a) wage income from businesses and economic activities managed by villages, (b) subsidies, aid and fund from villages, and (c) wage income from the private sector. Component (b) includes compensation and subsidies for being a cadre along with aid and funds such as comfort funds to families of revolutionary martyrs, financial aid to families living in extreme 26 While we cannot explicitly calculate the wage income earned by cadres (i.e., the compensation and subsidies for being a cadre from both village coffers and government treasury), we are able to infer it under reasonable assumptions. Specifically, when comparing village subsidies, aid and funds between cadre and non-cadre households, we find that, on a per capita basis, cadre households earn an average of 60 Yuan per capita from this income component (i.e., 54.33+5.559 = 59.889) while non-cadre households earn about about six Yuan, which are aid and fund from villages and do not contain cadre compensation and subsidies (Appendix Table 7). Since there is no reason to believe that the village aid and fund are distributed systematically in favor of cadre households, we consider the difference of 54 yuan in village subsidies, aid and fund between cadre and non-cadre households to be the average compensation and subsidies for being a cadre from village coffers. Moreover, and again as we discussed above, the other part of compensation and subsidies for being a cadre is included among transfers from the government. Then, we also consider the difference of eight Yuan in the transfer from government between cadre and non-cadre households as the compensation and subsidies for being a cadre from government treasury. Taking these results together, we infer that, on a per capita basis, cadre households earn about 62 yuan of compensation and subsidies for being a cadre. Taking account of the average family size of five for cadre households in our sample, this means that the average cadre wage was about 310 Yuan (measured in 1986 Yuan) in the period of 1986 to 1991 (i.e., 62 * 5 =310). Our inference of the wage income earned by cadres appears to be reliable. To assess the reliability of our inference, ideally, we would draw a comparison with national/large-scale surveys on cadre wage income. Unfortunately, no such surveys are available. Instead, we put our inference in perspective by citing a number of studies, which survey cadre wage incomes in specific locations of China. Specifically, two studies show the cadre wage income to be 1510 Yuan in year 2003 in one county of Shannxi province and 4060 Yuan in 2006 in another county of the province while another study shows the average cadre wage income to be 2014 Yuan in 2003 in four counties of Hubei province (Peng and Zhang, 2003; Wang, 2004; Wang, Ning and Rae, 2008). When measured in 1986 Yuan, these cadre wage income numbers become 460, 1237 and 667 Yuan, respectively. Thus, taking into account the fact that per capita income in rural China during the period of 1986 to 2006 had increased by 150%, our inference of 310 Yuan does not seem to be at odds with these studies. It is important to note that, on a per capita basis, Communist Party membership households on average obtain only about 15 Yuan from village subsidies, aid and funds, which is much less than what is received by cadre households. This is consistent with the fact that since Communist Party membership households do not earn wage income for being a Communist Party members, the income from village subsidies, aid and funds for Communist Party membership households should be much less than that for cadre households.

> 27 Since we show that local wage employment is the only source for the income return to cadre households, we only focus on local wage income here.

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