Income Distribution And Service Sector Growth

The development of service industry is a necessity of the change of theeconomic development pattern and the adjustment of the industrialstructure, and it is also an important part of fulfilling people’s livingneeds and increasing the enterprises’ additional value as a intermediateinput. Since the reform and opening up, service industry in China hasbeen developing rapidly, but the proportion of the value added in serviceto GDP is still low compared with other BRIC countries, and with thecountries of the same per capita GDP and similar economic developmentstages. In the initial distribution of the structure of income, the proportionof residents’ income to the national income is declining, while theproportion of government income distribution is rising. In addition, Chinahas the typical characteristics of the dual economic structure, whichmeans that the ratio of disposable income of urban residents per capitaand net income of rural residents is increasing. In the evolution of theexpenditure approaches calculating GDP, the role of investment andexports is improving in promoting economic growth, while the role ofconsumption is declining.There must be connections among the widening gap of incomedistribution, the low rate of consumption and the lag-behind developmentof the service industry. My point of view is that the income distributioninfluences on the consumption of different allocation groups, and therebyinfluences on the increase of service industry; moreover, what thechanges of income distribution influence is not the output value, but theincrease rate of the service industry. Therefore, this paper uses theconsumption expenditure as the conduction factor of the impact ofincome distribution on service industry growth, and explores therelationship between them from the two dimensions of the incomedistribution of government and residents, and the income distribution ofurban and rural residents.In the income distribution of the government and residents, the rise ingovernment revenue allocation has a crowding-out effect on the residents’consumption, and fiscal spending has both crowding-out and complementary effect on it. Empirical research shows that the combinedeffect is negative, that is, the rise of the proportion of government in theallocation of national income inhibits the enhancement of the serviceindustry.In the income distribution of urban and rural residents, the marginalpropensity to consume and the income elasticity of demand issignificantly higher than that of urban residents now; so from the aspectof the flow of income distribution, increasing the proportion of theincome distribution of rural residents will promote the service industry.However, empirical research shows that the ratio of urban income to ruralincome and the proportion of service industry have a positive relationship;the reason is that the ratio is calculated with the per income of urban andrural residents, but there are large income gaps in the cities and villages;and moreover, urban residents have more invisible income from areassuch as houses and education than rural ones. China’s dual structurecharacteristics, the household registration system, and the inability ofstorage and transport of service, all lead to the less development of ruralservice industries.The change of urban and rural residents’ marginal propensity toconsume and the change of income elasticity of demand, both of whichare caused by the change of income distribution gap, and the change ofincome distribution gap itself, all determine the growth rate of the serviceindustry. Through the use of the ratio of income and the dynamic modelof MPC changes, I find that with the widening urban-rural income gap,the growth rate of the added value first increased and then decreased, butthe first derivative of the service industry growth is negative, that is, theincrease speed of the growth rate is declining, and vice versa. I proposedto adjust the tax structure, reduce the proportion of government in theinitial distribution of the national income and increase the share ofresidents’ income distribution; increase the proportion of governmentexpenditure on public services and transfer payment, and reduceadministrative expenses; break household registration restrictionsgradually, increase the supply of the service industry in rural areas andnarrow the income gaps of urban and rural residents to achieve sound and rapid development of service industry.However, there are also some inadequacies in this paper. In calculatingincome elasticity, I don’t take price factor into account, which may leadto results deviation. In discussing income distribution and increase of theservice industry, I regard consumer expenditure as the only conductionfactor of the income distribution affecting the growth of service industries.And it’s not perfect to use urban and rural residents’ income as indicatorsto measure the gap in income distribution. I will cover these stated points,complement the study, and try to give more policy support in the furtherstudy.