Summary:
Since the reform and opening up, China's economy has demonstrated many remarkable achievements, but its capital-driven economic growth model has frequently been attacked as “inefficient” and “unsustainable.” These attacks are based on the notion that the diminishing law of capital marginal returns restricts economic growth. However, Japan, the “Four Little Asian Dragons,” and China mainland have all attempted to deal with this economic bottleneck through various channels. Some studies hold that the equal expansion of capital and labor under a “dual economic structure” inhibits the diminishing marginal returns of capital. However, the data show that the degree of capital deepening in China is actually increasing. This paper also starts from the “dual economic structure” and proposes a new way of thinking about how the Chinese economy can break the restriction of the decreasing marginal return of capital. In this view, the labor price distortion caused by labor mobility and the household registration system provides a source of monopoly profit for factor market buyers. The monopoly profit created by this distortion subsidizes the enterprise's return on capital and thus promotes the continuous accumulation of capital. There is no doubt that factor price distortions and their mismatches in price performance will harm output performance and total factor productivity, and this issue has been widely discussed. The excessive profit subsidy by the labor price distortion of corporate capital has been an important channel in China's economy for offsetting the diminishing marginal return of capital, but few studies have focused on its specific role in the period of economic growth. Therefore, this paper attempts to provide a more objective and comprehensive examination of the effect of labor price distortion on China's capital output, capital return, and capital flow. This paper is based on the monopoly market equilibrium model of the factor buyer in the production department. It uses Chinese provincial panel data from 1996 to 2016 to measure the degree of Chinese labor price distortion, and it uses the fixed effect model (FE) and the instrumental variable of the panel fixed effect (IV) to estimate the parameters. Using this method, the paper analyzes China's capital output, capital return, and capital flow from the perspective of labor price distortion. It thus shows how the Chinese economy achieves both low capital output and high return on capital in a phase of increasing capital deepening and weak TFP growth by relying on labor price distortion, thereby maintaining long-term high-speed capital accumulation and high-quality capital flow structure. The empirical analysis shows that the negative distortion of labor price in China has existed for a long time, which has reduced the efficiency of capital production. However, this does not cover the direct subsidy throughout the return of monopoly profits transferred from labor to capital; the labor price distortion has thus played an important supporting role for China in maintaining a high level of return on capital. The result has been a rapid accumulation of regional capital through a high return on capital. The positive effect of labor price distortion on capital flow is also reflected in restraining the capital from “de-reality” and attracting foreign capital inflows. It is important to understand that the distortion of labor prices is only an intermediate state created by special conditions, such as surplus labor flow and market segmentation in the catch-up phase. This distortion will surely disappear as China goes beyond the “dual economy” development stage and the marketization of factor markets. Although the labor price distortion plays an important role in breaking the marginal diminishing returns of capital in the catch-up phase, the distortion phenomenon and its effects are unsustainable. After the Chinese economy enters the “new normal” stage, the collapse of labor price distortion will bring new challenges to sustained economic growth. This correction will bring about an increase in output efficiency but reduce the return on capital and change capital flows, leading to a decline in capital growth, driving capital to “de-reality” and increasing the risk of international capital outflows. It will consequently have an adverse impact on economic growth. Therefore, it is necessary to actively take measures to avoid the adverse effects of distortion correction on capital return and capital flow. In this way, it can create new channels to address the diminishing marginal output of capital, transform the economic growth model from capital-driven to total factor productivity driven, and ensure the healthy and orderly development of the national economy.
柏培文, 杨伊婧. 中国资本产出、资本回报与资本流向之谜——基于劳动力价格扭曲视角[J]. 金融研究, 2020, 475(1): 47-68.
BAI Peiwen, YANG Yijing. The Puzzle of China's Capital Output, Capital Return, and Capital Flow: From the Perspective of Labor Price Distortion. Journal of Financial Research, 2020, 475(1): 47-68.
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