The urban inequality in Vietnam has declined in the 1990s. Using the regression-based decomposition methods [Fields, G.S., 2003. Accounting for income inequality and its change: a new method, with application to the distribution of earnings in the United States. In: Polachek, S.W. (Ed.), Worker Well Being and Public Policy, Research in Labor Economics, vol. 22. Elsevier, New Jersey, pp. 1-38; Yun, M.S., 2006. Earnings inequality in U.S., 1969-99: comparing inequality using earnings equations. Review of Income and Wealth 52, 127-144.], we identify the contributing factors and distinguish between changes of the inequality due to changing returns to characteristics and distribution of these characteristics. We find that the changing returns to regional factors and to physical assets are behind the decline in urban inequality. However, the decline hides adverse changes from human capital and unemployment. Policies to encourage regional labor market integration, improve the quality of and equal access to education are important to make the equal urban distribution sustainable in the new millennium.