| Abstract | Since a long-run stable and sustainable exchange rate of RMB from 1994, ,currency undervaluation benefits export-oriented economy a lot, however, in the meanwhile, does currency undervaluation deteriorate the income inequality? The theoretical and empirical analysis in this paper indicates that currency undervaluation stimulates the trade sector and enlarges the labor demand, which improve the income of low income earners and decreases the income inequality in the whole society. We argue that the relation between income inequality and the currency undervaluation depends largely on the incompleteness of the country’s labor market. The less incomplete an economy market is, and the less distorted a labor market is, the more effect that currency undervaluation have on reducing the income gap. Specifically, currency undervaluation can reduce income inequality significantly in a developed countries with a complete market and flexible labor mobility. However, currency undervaluation will not improve income inequality in many developed countries which features the market distortion and inflexible labor mobility. |