Understanding income volatility in urban China

Higher income volatility is associated with a higher risk and a reduction in well-being. Income volatility is widely studied in many advanced economies, yet little is known about income volatility in China. In this paper we document trends in earnings volatility and household income volatility in urban China and examine what are the driving forces. Using the China Urban Household Survey, we find that male earnings volatility increased by 89% between 1992 and 2009. Earnings volatility is higher for older, less educated, and those who work in private service sector and non-SOEs. Decomposition analysis suggests that couple’s earnings shocks are positively correlated, while transfer income and other income help smooth out head earnings shocks. In addition, transfer income and other non-transfer income plays a larger role in smoothing out head earnings shocks for poorer households.