Empirical Study on Relationship between Income Structure and Consumption of Rural Residents in Jiangsu

Wei ZHANG, Xiejun CHENG

1. Jiangsu Maritime Institute, Nanjing 211170, China; 2. Jiangsu Second Normal University, Nanjing 210013, China

Abstract After the Chinese economy enters a new era, there has been significant changes in the pull of consumption, investment, and import and export for the economic growth, and consumption has gradually become the main driving force of economic growth. The core factor influencing the consumption is income, so it is particularly important to study the impact of income and its structure on the consumption. Based on the relevant data of Jiangsu’s income and its structure and consumption in 1992-2018, using Granger causality test and other methods, we built an econometric model, and made an empirical analysis on the relationship between the two, and finally came up with conclusions and recommendations.

Key words Income structure, Consumption, Granger causality test

1 Introduction

2020 is the year of the realization of China’s "the first Centenary Goal of comprehensively building a moderately prosperous society". In the face of the sudden occurrence of new coronavirus disease (COVID-19), economic growth has encountered major setbacks. In particular, the pull of import and export to economic growth has been almost completely lost, so it is badly needed to stimulate consumption to drive the economic growth. In China, Jiangsu has always been an economically developed province and is a practitioner of the "two priorities". It plays a leading role in many aspects. In the context of the current unfavorable economic situation, how to boost the consumption of residents, especially the consumption of rural residents, has important practical significance. Li Rui and Xiang Hairong analyzed the impact of different types of income on rural residents’ consumption, and found that the impact of persistent income is more significant, while the impact of temporary income is not significant[1]. Wang Jianyu and Xu Huiqi divided income into four types of sources, made an empirical study of the relationship between different sources and consumption based on Chinese data, and found that the marginal consumption propensity of persistent income is relatively stable, and finally recommended to take measures to make wage income become stable income of rural residents[2]. From the perspective of Engel’s law, Gong Shien analyzed the relationship between income and food consumption, and found that for Chinese rural residents, operating income can promote the marginal consumption of food, to increase rural residents’ consumption, it is necessary to raise various income levels of rural residents on a large scale[3]. Li Yi and Xu Bin built an ELES model and found that different incomes affect different consumption types of rural residents, and the income of rural residents working in cities has a greater impact on their consumption structure[4]. Wang Yan, Hao Conghui and Lu Honghao studied the impact of rural residents’ wage income and net property income on consumption structure, and found that net property income has a significant impact on survivable consumption, and wage income has a significant impact on the upgrading of consumption structure[5]. Based on panel data of 263 prefecture-level cities, Liang Yanyan, Yang Qiao and Chen Cheng introduced house prices as an intermediary variable and found that narrowing the income gap is favorable for resident consumption, and thus it is necessary to increase rural resident income to ensure long-term stable growth of resident consumption[6].

2 Analysis of the current situation of income structure and consumption of rural residents in Jiangsu

According to the classification standard of per capita income of rural households by the National Bureau of Statistics of China, income comes from four categories: wage income, net operating income, property net income and net income from transfers. For the purpose of explanation, the wage income of rural residents is denoted asincomeu1, net operating income is denoted asincomeu2, property net income is denoted asincomeu3, net income from transfers is denoted asincomeu4, per capita consumption of rural residents is denoted ascsu, subscript represents rural area. From the perspective of absolute income, wage income and net operating income are the main income sources of rural residents in 1992-2018, while the relative proportions of net property income and net income from transfers are relatively low. Besides, as to the growth rate, the growth rate of property net income and net income from transfers is relatively fast, while the growth rate of operating net income is relatively slow. These reflect that the income of rural residents still mainly depends on wage income and net operating income. At the same time, the transfer payments of the state to rural residents have increased rapidly, indicating that the level of social security for rural residents has also been greatly improved. In addition, the net property income has also increased rapidly, indicating that the property owned by rural residents has also increased significantly. Judging from the absolute amount of consumption, the consumption of rural residents in Jiangsu has increased year by year from 1992 to 2018. However, the growth rate is still unstable, showing a large fluctuation, indicating that the consumption of rural residents is still influenced by many uncertain factors.

3 Building of the econometric model

3.1 Explanatory variables and data processingIn this study, we selected the relevant data of rural residents’ wage income, net operating income, net property income, net income from transfers, and per capita consumption of rural residents in 1992-2018. The initial data was obtained from theStatisticalYearbookofJiangsuProvince. In order to ensure the comparability between the data, it is necessary to remove the influence of the social price level, and use 1978 as the base period to deflate the annual data.

3.2 Data processingTo weaken the heteroscedasticity and skewness of the time series and reduce the dependence of empirical analysis on extreme observations, take the natural logarithms ofincomeu1,incomeu2,incomeu3,incomeu4, andcsu, and their natural logarithms are denoted as lnincomeu1, lnincomeu2, lnincomeu3, lnincomeu4, and lncsu, respectively.

3.3 Model buildingBased on the above analysis, we established the econometric model as follows:

lncsu=α+β1lnincomeu1+β2lnincomeu2+β3lnincomeu3+β4lnincomeu4+ε

(1)

whereαis a constant term,βiis parameter of each explanatory variable, andεis the residual error.

4 Empirical results

4.1 Data descriptive statistics and unit root testData descriptive statistics are listed in Table 1 and the unit root test is shown in Table 2. From Table 1, it can be known thatADFtest variables of lnincomeu1, lnincomeu2, lnincomeu3, lnincomeu4and lncsurejects the hypothesis that there is no unit root in the original sequence, that is, consumption, wage income, net operating income, net property income and net income from transfers are all unstable variables at the 5% significance level. Besides, after the first-order difference, ADF test of all variables accepts the hypothesis that there is no unit root, in other words, lnincomeu1, lnincomeu2, lnincomeu3, lnincomeu4and lncsuare first-order stationary sequences.

4.2 Johansen cointegration testThe Johansen cointegration test method was used to analyze the cointegration relationship among lnincomeu1, lnincomeu2, lnincomeu3, lnincomeu4and lncsu, and with the aid of Eviews 9.0, obtained the test results in Table 3. According to Table 3, at the 5% significance level, the value of the trace statistic is 148.42, which is significantly greater than the critical value of 60.06, rejecting the null hypothesis of "0 cointegration vectors", and there is a long-term stable relationship between all variables.

Table 1 Basic description of data

Table 2 Results of the unit root test

Table 3 Results of Johansen cointegration test

4.3 OLS regression resultsAccording to analysis of Table 1 and Table 2, lnincomeu1, lnincomeu2, lnincomeu3, lnincomeu4and lncsuare first-order stationary sequences, there is a cointegration relationship, and the least square method can be used for regression analysis, and the Formula (2) is obtained:

lncsu=4.5-0.27lnincomeu1+0.34lnincomeu2+0.12lnincomeu3+0.44lnincomeu4

(2)

(2.69) (1.77) (1.89) (2.13) (3.88)

AdjustedR-squared=0.96 F-statistic=98.39 D-W=1.81

The Formula (2) indicates that all explanatory variable parameters passed the t test, and the goodness of fit was 0.96, indicating that the model was well explained. F-statistic=98.39 indicates that the regression equation is significant, and D-W=1.81 can exclude autocorrelation. In summary, Formula (2) can significantly explain the effect of rural residents’ wage income, net operating income, net property income and net income from transfers on consumption. From the coefficients of various variables, it can be seen that net operating income, net property income and net income from transfers have a significant positive effect on the consumption level of rural residents. However, unexpectedly, wage income has a significant negative effect on the consumption level of rural residents.

Based on the above empirical results, combined with existing literature research, it can be found that the increase in the consumption level of rural residents in Jiangsu is mainly affected by the growth, stability and continuity of income, and the uncertainty of income will reduce the consumption level of rural residents. This can explain the results of empirical study: the net operating income has the characteristics of growth, stability and sustainability for rural residents; the net income of rural residents has increased significantly in recent years, which may be related to the leading position of the Jiangsu economy in China; the net income from transfers has also grown very rapidly, especially the central government and Jiangsu Province have been emphasizing the improvement of the rural social security system. Therefore, the net operating income, net property income and net income from transfers have a significant positive effect on the consumption level of rural residents. However, the rural residents’ wage income lacks stability and is a temporary income. Although the opportunities and enthusiasm for rural residents to go out to work are very high at the current stage, they are basically not yet guaranteed income, frequent job changes and lack of institutional guarantees have led to farmers’ lack of stable expectations and confidence in wage income, consequently leading to a significant negative impact of wage income on rural residents’ consumption levels.

5 Conclusions and recommendations

The above empirical analysis resolves the problem from the relationship between income and consumption what the government should do to ensure the continuous and stable realization of rural residents’ income growth. It is recommended to effectively increase the income of rural residents, especially the absolute amount and proportion of net property income and net income from transfers. Through increasing the income, the consumption level can be effectively improved. Net property income and transfer payment income can enhance the optimism of rural residents about future income and be more favorable for improving the consumption level. Specifically, it is recommended to take following measures. In the first place, it is recommended to strengthen the construction of agricultural infrastructure, improve the level of basic public services in rural areas, and lay the foundation for rural residents to further increase their net operating income and net property income. In the second place, it is recommended to improve the rural pension insurance and medical insurance, reduce the proportion of individual contributions in pension insurance expenses, increase the reimbursement ratio of medical insurance, and increase the net income of rural residents. In the third place, it is recommended to regulate various systems for farmers to work in cities, achieve non-discrimination against migrant workers, grant citizen treatment, and change the existing expectations of rural residents on wage income.