Ageing and inequality in China

Two major ongoing trends for China over the last decade or more have been increasing income inequality, and an ageing population. Could they be related? That is the research question addressed in this 2018 article by Xudong Chen (Baldwin Wallace University), Bihong Huang (Asian Development Bank Institute), and Shaoshuai Li (University of Macau), published in the journal The World Economy (ungated earlier version here). They use data from the China Health and Nutrition Survey (CHNS), which includes longitudinal data on 4400 households from 36 suburban neighbourhoods and 108 towns, collected over nine waves between 1989 and 2011. They look at how within-cohort inequality varies over the life cycle within their data, and find that:

An increasing age effect on income inequality is observed for most cohorts, although not linear...

The coefficients on age, our main variable of interest, are significantly positive, indicating that ageing population enlarges inequality in both income and durable consumption.

The implication is that, as the population ages in aggregate, overall inequality will increase. That is because as birth cohorts age, the within-cohort component of inequality increases. It is also because more of the population will be in older age groups, where within-cohort inequality is higher.

However, there is an important piece of the puzzle missing in the Chen et al. paper. That is the between-cohort component of inequality. Chen et al. include cohort fixed effects in their models, but they don't tell us anything about whether the inequality between birth-cohorts is increasing, decreasing, or remaining steady over time. If the income gap between successive cohorts is narrowing, that could offset the increasing within-cohort inequality. On the other hand, if the income gap between successive cohorts is increasing, that will make inequality even worse. We just don't know, and yet there is evidence that inequality in China may have started to decrease (see here).

The Chen et al. paper therefore gives us some insight into only part of the question about how an ageing population may overall contribute to increasing inequality over time. Interestingly, that is one potential contributor to global inequality that could have used more thorough exposition in Branko Milanovic's book Global Inequality (which I reviewed yesterday). After all, China is a large contributor to global inequality (see here).

Now, there are good theoretical reasons to believe that ageing populations increase inequality (and those reasons, starting with Modigliani's lifecycle theory, are briefly explained in the Chen et al. paper). How much extra inequality we may have as a result of population ageing, and the consequences (if any) of increasing inequality that arises from population ageing, are interesting questions that thoughtful researchers are hopefully considering. I just hope that they are considering both the within-birth-cohort and between-birth-cohort components of inequality.