The Impact of Different Levels of Income Inequality on Subjective Well-Being in China: A Panel Data Analysis

Abstract Income inequality is one of the most serious issues globally and China is the representative examples of this issue. Income inequality remains high in China and may negatively affects subjective well-being. This study clarifies whether income inequality affects subjective well-being in China. Using five waves of the 2010-2018 data from China Family Panel Studies, a panel data analysis reveals the following: First, general income inequality measured by provincial Gini coefficients has a significant U-shaped impact. Second, between-group income inequality, measured as income ratio between urban hukou residents and migrants with rural hukou, has a significant U-shaped impact. Third, urban-rural income inequality measured by provincial urban to rural household per capita income ratio has an inverted-U-shaped impact. To address endogeneity problems of income inequality, this study adopts instrumental variable approach. For the further robustness checks of the validity of the instrumental variable used, this study adopts the recent Conley et al. (2012) bounds approach. Our results are robust after addressing endogeneity problem. One important policy implication stemming from our results is the need to adopt strategies that ensure a more inclusive society without hukou-related and urban–rural discrimination.