Abstract: In an attempt to see how and to what extent social capital affects income inequality, this paper explores the income differential between rural migrants and urban workers in contemporary China. The decomposition method is used to identify two ways through which social capital generate income gap between these two groups, including their differences in occupational attainment and those within occupational categories. Data from Jsnet 2009 reveal that the household registration system (hukou) and individual’s interaction with homogeneous group lead to migrants’ lack of accumulation of social capital relative to their urban counterparts, and their subsequent difficulties in getting jobs with higher pay, as well as their limited bargaining power at work. It is clear that it is the combined effects of two ways that make migrants earn less than urban workers. Therefore, social capital works as a micro mechanism which sustains and reinforces social inequality. The effects of social capital discussed above differ from those of human capital. The difference in human capital between migrants and urban workers lies in the urbanrural difference in the distribution of educational resources, which can be regarded as a result of state control. The case is different when we attempt to explain the social capital difference between migrants and urban workers, as it is an autonomous process, in which both groups of people form their own social networks initiatively. The household registration system, as a type of state control, not only causes the social inequality, but also reproduces social inequality due to its power to shape people’s interaction with others. Migrants, thus, are living in both formal and informal social exclusions. Accordingly, future policy should focus on stabilizing migrants’ jobs in cities, and making them embedded in urban social networks.

Key words: occupational segregation, human capital, social capital, wage income differentials, rural migrants