Nonfarm Activity and Rural Income Inequality: A Case Study of Two Provinces in China

Abstract: Non-farm activity plays an increasingly important role in rural household income. Based on data from the Living Standards Measurement Study in the provinces of Hebei and Liaoning, we study the distribution of non-farm income in rural China. First, we assume non-farm income as an exogenous transfer to total income to decompose the Gini index; second, we assume non-farm income as a potential substitute for farm income to take household choices into account and simulate household income. The results show that non-farm activity reduces rural income inequality by raising the income of poor households to a larger extent than that of rich households. Improving rural infrastructure and implementing universal basic education are critical to build up the capacity of households (in particular poor households) to participate in non-farm activity. Strengthening the linkages between farm activity and non-farm activity is essential to optimize the contribution of non-farm activity to pro-poor rural economic development