Strict Financial Regulation and Labor Income Share: Empirical Evidence Based on the New Capital Management Regulation
MA Hui, CHEN Shenglan, LIU Xiaoling, WANG Pengcheng
Institute of Accounting and Finance, Shanghai University of Finance and Economics; School of Economics, Zhejiang University of Technology; Lingnan College, Sun Yat-sen University
Summary:
Labor income share is a major issue concerning people's livelihood and is also closely related to long-term social stability and sustained economic growth. The report of the 20th Party Congress considers increasing people's income level as an important factor for realizing the common wealth of all people. It explicitly states that doing so is necessary to improve the order of income distribution, regulate wealth accumulation, and increase the share of residents' income in the distribution of national income. Once finance deviates from the essence of serving the economy and overrides the real industry, it will distort the distribution share between capital and labor. Based on China's strict financial regulation system, which guides the flow of social capital from the financial system to the real economy, this paper examines its impact on the share of labor income and the underlying mechanism, shedding light on the role of financial regulation in increasing the share of labor income. In 2018, the People's Bank of China, together with a number of departments, issued the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (the “New Regulations on Asset Management”) to regulate the development of the asset management business in the financial market and informal financing, as represented by shadow banking, and to urge the return of capital to the real economy. Under strict financial regulation, enterprises return to the real business and can then cause an increase in the share of labor income. This is because financial investment income, which is independent of the production process, limits labor's right to claim the distribution of financial investment income. In contrast, as labor is an important input in the value creation of real businesses, it has bargaining power to participate in income distribution. Furthermore, due to strict financial regulation, enterprises are increasingly reliant on real channels for profitability. This in turn prompts enterprises to increase high-skilled labor, which is necessary for improvement in both production technology (e.g., technological research and development) and production processes. Thus, given the strict financial regulation, increased demand on high-skilled labor by firms will also increase the share of labor income. Using a sample of non-financial listed firms in China, we construct treatment and control groups based on the degree of financialization of the firms before regulation. The difference-in-differences results show that compared with the control firms, the share of labor income of the treated firms increases by approximately 3.5% after the implementation of the new regulations. Upgrading labor skills under strict financial regulation is important. The cross-sectional results show that the new regulation has a more pronounced effect on labor income share when firms demonstrate over-financialization, employ executives with financial backgrounds, are located in regions with higher levels of private financial development, and have labor with stronger bargaining power. Finally, we find that strict financial regulation mainly increases the income share of rank-and-file employees, rather than executives, and the income gap between executives and employees decreases. This paper identifies a key factor in increasing the labor income share from a new research perspective. Previous studies examine the determinants of labor income share from the perspectives of the institutional environment, economic structure, and workers' bargaining power at the micro level. Few studies examine the impact on labor income share from the perspective of financial market development. Focusing on financial regulation, this paper finds that strict financial regulation is an important factor in raising the labor income share. It enriches and extends the research on the economic consequences of financial regulation by examining its impact on labor income distribution. Finally, this paper finds that strict financial regulation increases the income share of rank-and-file employees, rather than executives, and the income gap between executives and employees decreases, which has policy implications for adjusting income distribution and promoting common prosperity.
马慧, 陈胜蓝, 刘晓玲, 王鹏程. 金融强监管与劳动收入份额——基于资管新规的经验证据[J]. 金融研究, 2023, 522(12): 132-149.
MA Hui, CHEN Shenglan, LIU Xiaoling, WANG Pengcheng. Strict Financial Regulation and Labor Income Share: Empirical Evidence Based on the New Capital Management Regulation. Journal of Financial Research, 2023, 522(12): 132-149.
Abernethy, M. A., Y. F. Kuang and B. Qin, 2015, “The Influence of CEO Power on Compensation Contract Fesign”, The Accounting Review, 90(4),pp.1265～1306.
[23]
Acemoglu, D., 2003, “Labor‐and Capital‐augmenting Technical Change”, Journal of The European Economic Association, 1(1),pp. 1～37.
[24]
Alvarez, I., 2015, “Financialization, Non-financial Corporations and Income Inequality: The Case of France”, Socio-Economic Review, 13(3),pp.449～475.
[25]
Autor, D. H, F. Levy and R. J. Murnane, 2003, “The Skill Content of Recent Technological Change: An Empirical Exploration”, The Quarterly Journal of Economics, 118(4),pp. 1279～1333.
[26]
Bai, J., D. Carvalho and G. M. Phillips, 2018, “The Impact of Bank Credit on Labor Reallocation and Aggregate Industry Productivity”, The Journal of Finance, 73(6),pp.2787～2836.
[27]
Barth, J. R., G. Caprio Jr and R. Levine, 2004, “Bank Regulation and Supervision: What Works Best”, Journal of Financial Intermediation, 13(2),pp. 205～248.
[28]
Bekaert, G.and M. Hoerova, 2016, “What Do Asset Prices Have to Say about Risk Appetite and Uncertainty”, Journal of Banking & Finance, 67,pp.103～118.
[29]
Blanchard, O.and F. Giavazzi, 2003, “Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets”, The Quarterly Journal of Economics, 118(3),pp.879～907.
[30]
Dünhaupt, P., 2017, “Determinants of Labour's Income Share in the Era of Financialisation”, Cambridge Journal of Economics, 41(1),pp.283～306.
[31]
Farber, H. S., D. Herbst, I. Kuziemko and S. Naidu, 2021, “Unions and Inequality over the Twentieth Century: New Evidence from Survey Data”, The Quarterly Journal of Economics, 136(3),pp.1325～1385.
[32]
Fisher, R. A.,1936,The Design of Experiments, London: Oliver and Boyd.
[33]
Griliches, Z.,1969, “Capital-skill Complementarity”, The Review of Economics and Statistics,pp.465～468.
[34]
Guschanski, A.and Ö. Onaran,2018, “The Labor Share and Financialisation: Evidence from Publicly Listed Firms”, Working Paper.
[35]
Keys, B. J., T. Mukherjee, A. Seru and V. Vig, 2009, “Financial Regulation and Securitization: Evidence from Subprime Loans”, Journal of Monetary Economics, 56(5),pp.700～720.
[36]
Krishnan, K., D. K. Nandy and M. Puri, 2015, “Does Financing Spur Small Business Productivity？ Evidence from A Natural Experiment”, The Review of Financial Studies, 28(6),pp.1768～1809.
[37]
Lin, K. H.and D. Tomaskovic-Devey, 2013, “Financialization and US Income Inequality, 1970-2008”, American Journal of Sociology, 118(5),pp.1284～1329.
[38]
McNichols, M. F.and S. R. Stubben,2015, “The Effect of Target-firm Accounting Quality on Valuation in Acquisitions”, Review of Accounting Studies, 20,pp.110～140.
[39]
Morris, S.and H. S. Shin,1998,“Unique Equilibrium in A Model of Self-fulfilling Currency Attacks”, American Economic Review,pp.587～597.
[40]
Oster, E, 2019, “Unobservable Selection and Coefficient Stability: Theory and Evidence”, Journal of Business & Economic Statistics, 37(2),pp.187～204.
[41]
Özdemir, O.,2019, “Financialization and the Labor Share of Income”, Review of Economic Perspectives, 19(4),pp.265～306.
[42]
Reinhart, C. M.and K. S. Rogoff, 2008, “Is the 2007 US Sub-prime Financial Crisis So Different？ An International Historical Comparison”, American Economic Review, 98(2),pp.339～44.
[43]
Stockhammer, E.,2009, “Determinants of Functional Income Distribution in OECD Countries”, Working Paper.
