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Using annual urban household survey data from 6 provinces in different regions of China, we analyze the rapid increase in earning inequality of urban China from 1988 to 2003. We describe overall and residual inequality trends and use quantile regression to address the relationship between education and earning inequality. We find that returns to education are higher for the low earning individuals in the first half of this period conditional on their observable characteristics. This suggests that education has a negative impact upon within-group earning inequality. However, the situation is reversed during the recent half period. Using the Quantile-JMP decomposition technique we partition the observed distribution of earnings into 'price' components (earning coefficients) and 'quantity' components (labor force composition) and calculate, through simulation, the impact of education on changes in overall earning dispersion. The decomposition shows that the rise of earning dispersion between 1988 and 2003 is almost entirely accounted for by prices rather than quantities, and it attributes a large proportion to the overall effect of education. From 1988 to1997 education serves as the equalizing force to decrease earning inequality but it is the primary driving force which increases the earning inequality between 1997 and 2003. The empirical analysis also reveals that the overall effect of college and above education category on the growth of earning inequality is the most pronounced one.

Effects of Education on Earnings Inequality in Urban China: 1988-2003