Summary:
The cyclical fluctuations of labor income share in China are more pronounced compared to those of output cycles in China or labor income share cycles in the United States. These fluctuations play a crucial role in determining China's labor income share and have significant implications for economic cycle fluctuations. However, current research predominantly focuses on the long-term trends of labor income share, particularly on its U-shaped characteristics, paying less attention to its cyclical fluctuations. This paper distinguishes between the long-term trends and cyclical fluctuations of labor income share and focuses on studying the cyclical fluctuations of labor income share in China. It improves the analytical framework for studying labor income share by considering the characteristics of economic cycles, dividing total income into labor income, capital income, and monopoly profits, and establishing a theoretical model capable of characterizing the cyclical fluctuations of China's labor income share. This paper firstly utilizes the theoretical model to analyze the impact of various factors on profit share and the distribution of residual share between labor income and capital income, thereby proposing the core theoretical mechanism of exogenous shocks affecting the cyclical fluctuations of labor income share. Then, it calibrates and estimates the parameters using macroeconomic data from China. Employing methods such as variance decomposition, impulse response analysis, and historical decomposition, the paper identifies the main driving factors of cyclical fluctuations in China's labor income share. The research findings are as follows: Firstly, price markup shocks, capital-biased technological progress shocks, and monetary policy shocks are the main factors determining the cyclical fluctuations of China's labor income share, explaining 52.84%, 18.29%, and 15.87% of the cyclical fluctuations, respectively. Furthermore, the impacts of these three shocks on the cyclical fluctuations of labor income share differ significantly from their impacts on the long-term trends of labor income share. Secondly, price markup shocks and monetary policy shocks lead to pro-cyclical fluctuations in labor income share, while capital-biased technological progress shocks lead to counter-cyclical fluctuations. The impact of these exogenous shocks on labor income share first depends on their impact on profit share, followed by the distribution of the residual share between labor income and capital income. Thirdly, during periods of pronounced cyclical fluctuations in China's labor income share, price markup shocks are the dominant factors determining its trends, with significant impacts also from capital-biased technological progress shocks and monetary policy shocks. These periods coincide closely with significant real-world events such as China's accession to the WTO, the US subprime mortgage crisis, the European debt crisis, and China's economy entering a new normal phase and implementing supply-side structural reforms. The research of this paper shows that we must attach great importance to the cyclical fluctuations of labor income share, give full play to the role of monetary policy and other stabilizing policies, continuously optimize the market environment for fair competition, stabilize labor income share at a reasonable level, and take effective measures to actively cope with the adverse impact of the new generation of technological revolution on labor income share. The main contribution of this paper is as follows: First, we found that the periodic fluctuation of China's labor income share is more intense than that of the periodic fluctuation of China's output or that of the United States' labor income share, which is an important factor determining China's labor income share. Therefore, we clearly distinguishes between the long-term trend of labor income share and cyclical fluctuations, and takes the periodic fluctuations of China's labor income share as the research object. Secondly, according to the characteristics of the business cycle, the analysis framework for the study of labor income share is improved, and the total income is divided into labor income, capital income and monopoly profit. By analyzing the influence of various factors on the profit share and the distribution of the surplus share between labor income and capital income, the core theoretical mechanism of external shocks affecting the cyclical fluctuation of labor income share is proposed. Considering that price markup shocks play a decisive role in the cyclical fluctuation of China's labor income share both at the overall level and in various periods, it is necessary to further explain what factors drive the price markup shocks and thus determine the cyclical fluctuation of China's labor income share, which is a feasible research direction in the future. In addition, the reasons for the fluctuation of China's labor income share are not only related to macro-level factors, but also to middle-level factors such as industrial policies. Therefore, another feasible direction is to expand the model of this paper to multi-sector cases, so as to further analyze the impact of supply structure, demand structure and industrial policy on labor income share.
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