Optimizing Income Distribution Through Institutional Development

Income distribution is central to ensuring and improving the people’s wellbeing as it affects a range of areas spanning employment expansion and wage growth in primary distribution, social security and basic public service provision in redistribution, and public interest activities and charities in tertiary distribution. The income distribution system is the foundational institution for the promotion of common prosperity for all. The fourth plenary session of the 20th CPC Central Committee held in 2025 further defined the objectives for improving the income distribution system, proposing to put into effect an income growth plan for both urban and rural residents, effectively increase the earnings of low-income people, steadily enlarge the middle-income group, make reasonable adjustments to excessive incomes, and eliminate illicit gains, all with the aim of facilitating the formation of an oval-shaped structure of distribution.

I. Current state and reform objectives for income distribution

The trend in China’s income distribution has shifted from widening to narrowing disparities, which aligns with key turning points in the country’s economic development. The first decade of the 21st century saw income gaps continue to expand. This phase coincided with a period of exceptionally rapid economic growth, during which rising wages, growing household incomes, and widespread improvement in living standards resulted primarily from the expanding economic “pie.” Against this backdrop, the increase in income inequality can be understood as a reflection of the time lag between those who prospered earlier and those who followed.

As China’s economic development enters a new normal, primary income distribution has become fairer and redistribution has made significant progress, embodying China’s high-quality and shared development. Since the early 2010s in particular, urban employment has expanded and wages for the average worker have risen noticeably. Due to vigorous efforts in poverty alleviation, rural populations have been steadily lifted out of poverty, as the goal to eliminate poverty for all 98.99 million rural residents below the poverty line was successfully achieved in 2020. In addition, more rural laborers have found jobs in cities and policies governing the living and working conditions of migrant workers have improved significantly. Meanwhile, China has set up the world’s largest social security and education systems, providing more and higher-quality basic public services for all residents.

Both statistical indicators and the personal experience of the Chinese people reveal the overall gradual improvement of China’s income distribution since the late 2000s. In terms of metrics for income disparity, the ratio of urban disposable income to rural disposable income dropped from a peak of 3.14 in 2007 to 2.34 in 2024. According to fund flow data, the proportion of remuneration for workers in total primary income distribution rose from the lowest point of 49.1% in 2007 to 53.6% in 2023, and the share of household income in total disposable income increased from the lowest point of 55.5% in 2008 to 61.2% in 2023.

We should also be aware that while Chinese modernization is the modernization of common prosperity for all, current income distribution remains far from satisfactory. This reflects imbalanced and inadequate development with gaps and weak links persisting in our work to ensure public wellbeing, which must be addressed with greater efforts.

According to data released by the National Bureau of Statistics on July 15, 2025, personal incomes in China showed stable growth in the first six months of 2025, and the national per capita disposable income reached 21,840 yuan, representing an increase of 5.3% in nominal terms. XINHUA / GRAPHICS BY XIAO XIAO AND CHEN BIN

II. Analysis of the causes of current income disparities

A specific pattern of income distribution naturally emerges from policy and institutional arrangements. It is also a phenomenon of social and economic development and therefore exhibits distinct characteristics of a particular development phase. For example, during the period of rapid economic growth in China, business behaviors and economic activities all aimed to increase total factor productivity, which often involved financial deepening and an increase in the capital-to-labor ratio. In other words, technological advancement and industrial upgrading inherently involve capital replacing labor, with capital-intensive equipment, machinery, and robots displacing certain jobs. In reality, this reflects a common feature in the process of modernization. Many countries have seen a drop in the share of remuneration and personal income in national income to varying degrees and at different times. For example, the IMF estimates that between 1990 and 2007, the share of remuneration in national income across OECD countries fell mainly because of increases in total factor productivity and the capital-to-labor ratio.

To understand China’s income inequality, we should situate it within its broader context of economic development. First, industrialization and industrial upgrading often involve capital deepening, where investments in machinery, equipment, and infrastructure grow faster than labor input. This shifts returns toward capital, leading to a decline in the share of labor remuneration and household income within national income. Second, as the growth model transitions from factor-driven to productivity-driven, human capital yields higher returns. This creates a divergence in employment quality and wage levels among workers, largely determined by educational background and skill proficiency. Finally, innovation aimed at boosting productivity and competitiveness is a process of “creative destruction.” Competitors may gain from successful innovations or lose from failed ventures, depending on their performance. Without an adequate social safety net, employees in affected businesses may face significant setbacks in terms of jobs, income, and living standards.

The urban-rural income gap is also a characteristic of economic development. Both the agricultural sector and the rural economy dominated by agriculture inevitably experience an outward flow of production factors in the process of industrialization and urbanization. This outward shift, most notably the transfer of surplus labor, represents resource reallocation that raises agricultural labor productivity while enhancing the overall productivity of the national economy. However, various factor constraints either hinder the expansion of agricultural operations, the mechanization of agriculture, and the complete transfer of surplus labor or even inhibit progress. As a result, agricultural productivity tends to grow more slowly than productivity in non-agricultural sectors. Consequently, returns for agricultural activities remain relatively low, leading to a widening income gap between urban and rural workforces. For example, in 2024, agriculture employed 22.2% of the total workforce but generated only 6.8% of GDP in terms of value added, highlighting the sector’s relatively low labor productivity. This explains why incomes from farming cannot keep pace with earnings from non-farming jobs. In the same year, income from farming and family-run businesses accounted for just 33.9% of total household disposable income, significantly lower than the 42.4% from labor wages.

If the reduction in rural income inequality and the narrowing of the rural-urban income gap are both more pronounced than the decline in overall income inequality, we can conclude, statistically speaking, that income disparities within urban areas have relatively widened and contributed more significantly to overall income inequality. Existing studies also support this pattern of divergence in China’s income distribution between urban and rural areas, providing quantitative evidence that urban income inequality has increased. In recent years, improvements in income distribution within urban areas have been less evident than those in rural areas and in the rural-urban gap. This is closely related to structural employment challenges in urban labor markets, including AI-driven job displacement and insufficient protection of platform workers’ rights and interests. Unless structural employment problems are effectively addressed and stronger policy measures are taken to promote equitable income distribution, the continued expansion of AI will inevitably cause further urban income disparities.

Income inequality in China is a product of its specific stage of development, shaped by underlying causes and internal logic. As development progresses, the context and state of income distribution evolve in tandem. The pattern of income distribution that emerges is closely linked to the focal points of institutional development and the orientation of policy implementation. For example, the increased share of labor remunerations and household income over the past decade is largely the result of persistent labor shortages. This shift has altered factor endowment and relative prices, as well as reshaped policy preferences. Major policy initiatives, such as the fight against poverty, rural revitalization, strong policy support for agriculture, rural areas, and rural residents, and improvements in the rural social security system have all played an important role in reducing rural income inequality and narrowing the urban-rural income gap. Likewise, more proactive employment policies have also contributed to increasing the incomes of average workers and their families in both urban and rural areas.

III. Priorities for improving income distribution

Ensuring and improving the people’s wellbeing through development is a fundamental task that requires establishing an institutional framework that enables all people to benefit from modernization, significantly narrowing income gaps, and continuously increasing the level of common prosperity for all. During the 15th Five-Year Plan period (2026-2030), in implementing an income growth plan for both urban and rural residents, our focus should be placed on creating synergy by coordinating efforts in primary distribution, redistribution, and tertiary distribution. This will effectively increase the earnings of low-income people, steadily enlarge the middle-income group, and make reasonable adjustments to excessive incomes, thereby facilitating the formation of an oval-shaped structure of distribution in which the middle-income group forms the majority. The following analysis examines the three areas of income distribution so as to identify the policy priorities for improving income distribution.

The annual dividend distribution ceremony is held on January 27, 2025 in Hounanyangbu Village, Handan City, Hebei Province. In recent years, a variety of measures have been adopted by many areas to develop rural collective economies and increase rural incomes. XINHUA / PHOTO BY CHENG XUEHU

First, efforts should focus on addressing structural employment challenges. In doing so, we must coordinate the development of the labor market with the improvement of employment-related institutions. Another area to address is optimizing the allocation of human resources and improving the mechanisms for determining wages, keeping them increasing at a reasonable rate, and ensuring their full payment, thereby increasing the share of labor remuneration in primary distribution. Given the widespread expansion of flexible and new forms of employment, it is imperative to accelerate the improvement of labor legislation and law enforcement, and strengthen labor market institutions, including adjustments to minimum wage standard, labor contracts, and collective wage bargaining, while also addressing age discrimination in employment. Moreover, as the adoption of AI has become more widespread, it is essential to ensure that new forms of employment are not treated as informal employment.

We should also advance reforms to the household registration system and related institutions. Under the premise of ensuring more equitable access to basic public services in urban and rural areas, further facilitating rational and orderly labor mobility, ensuring the flow and allocation of production factors are aligned with productivity improvement, unlocking the potential supply of non-agricultural labor, expanding the scope of resource reallocation, and stimulating consumption demand among new urban residents are all undertakings we can advance. Targeted measures should be taken to enhance public employment services for elder and young workers and provide skills training throughout the entire lifecycle of employment in order to better match workers to open job positions and ensure overall allocation efficiency in the labor market. Sound primary distribution mechanisms should also be established, through which the contributions of production factors are determined by the market and rewarded accordingly. This will allow higher incomes for those who work hard, possess highly valued skills, or excel at innovation.

Second, the implementation of redistribution policies should be strengthened through mechanisms including taxation, social security, and transfer payments to provide residents with a greater number of better, fairer, and more inclusive basic public services. Past experience, both domestic and international, has proven that improving primary distribution mechanisms alone is insufficient to effectively narrow income disparities. Therefore, guided by sound income distribution principles, improving social policies and advancing institutional development through redistribution are a crucial step in ensuring the more equitable sharing of economic benefits.

In leveraging the protective function of redistribution to reasonably regulate and gradually narrow income gaps between urban and rural areas, regions, industries, and social groups, it is necessary to optimize the tax structure, improve the local tax system and the direct tax system, refine taxation policies on income generated from business operations, capital, and property, and effectively implement special additional deductions for individual income tax.

The goals and measures of redistribution policies are reflected in both income distribution institutions and improvements to the basic public service system. This includes population support policies focused on childbirth, childrearing, and education; a human-capital development system centered on education and training; public employment services and labor market systems focused on enhancing the quality of employment; policies in response to population aging centered on eldercare, senior support, and the development of the silver economy; social security systems focused on healthcare, social insurance, and social welfare; and the supply of government-subsidized housing. Such measures will strengthen the role of social security in stabilizing income distribution. In addition, the social assistance system should be improved to better provide care and support for disadvantaged groups. The system of transfer payments also requires strengthening and structural optimization so as to narrow regional disparities in per-capita public expenditure.

Finally, it is necessary to foster an institutional environment that encourages and regulates the development of public interest activities and charities, encourages those who are already well-off to assist others in attaining wealth and promote prosperity for all, promotes an enhanced sense of social responsibility among all social entities, and fosters a social ethos that champions virtuous conduct. To fully leverage the supplementary role of tertiary distribution, high-income groups and enterprises should be encouraged to contribute even more to society. This requires refining charity systems, exploring effective forms of charitable engagement, cultivating and regulating the development of charitable organizations, and strengthening oversight of charitable activities, so as to guide and safeguard every act of kindness.

While charitable donations, volunteer activities, and corporate public-interest initiatives may have limited impact on income distribution in terms of scale or proportion, the significance of tertiary distribution lies in the social ethos formed by the accumulation of such acts of kindness, which provides moral support and helps guide social values toward common prosperity for all. For example, in the face of the double-edged sword effect of AI, which may dramatically boost productivity while also holding the potential risk of technological unemployment,  a social ethos that champions virtuous conduct helps guide investors, R&D institutions, and technology enterprises to look beyond narrow, short-term interests and steer technological development, innovation, and intelligence toward positive social ends, thereby ensuring technological progress benefits humanity and truly aligns with the goal of achieving common prosperity for all.

Cai Fang is an academician of the Chinese Academy of Social Sciences.

(Originally appeared in Qiushi Journal, Chinese edition, No. 23, 2025)