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| The Evolution of Chinese Labor Share and Drivers based on Manufacturing during 1998-2016 |
| YIN Heng, ZHANG DaoYuan, LI Hui
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| National Academy of Development and Strategy, Renmin University of China; Institute of Finance, Shandong Academy of Social Sciences; Economics and Management School, Wuhan University |
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Abstract Labor share refers to the proportion of compensation received by workers in newly created value within a country or region during a specific period. This indicator reflects the distribution of national income between workers and capital owners, and is crucial for understanding income distribution patterns and promoting sustainable economic development. For a long time, the labor share in many countries has remained relatively stable, a phenomenon that Kaldor included as one of the “stylized facts” of economic growth. However, doubts about the stability of labor share have persisted. In recent years, the global trend of declining labor share has attracted widespread attention and discussion in academic circles. As the world's second-largest economy, changes in China's labor share have significant implications for the global economic landscape. Although existing research has extensively examined China's labor share from a macroeconomic perspective, the calculation of labor share at the macro level is highly sensitive to the accounting scope of labor compensation. Moreover, macro-level analyses often rely on simplified micro-environment settings, sacrificing the rich information contained in micro-heterogeneity, resulting in an “incomplete explanation” of labor share changes and their influencing factors.
In light of this, this paper attempts to examine the evolution of China's labor share and its driving factors from a micro perspective to address the limitations of existing research. We combine the China Industrial Firm Database and the National Tax Survey Database to construct a large-sample firm dataset with broad coverage and a long time-span. Based on this dataset, we describe the trends in China's labor share from 1998 to 2016, employ various decomposition methods to identify the underlying driving forces, and quantify the impact of various factors through a structural estimation model. Our findings are as follows: First, China's labor share exhibited a distinct U-shaped trend between 1998 and 2016, with 2007 as the lowest point. Notably, the labor share across all industries consistently rose after the 2008 financial crisis. This finding provides micro-level support for the upward trend in macroeconomic labor share during the same period. Second, dynamic decomposition results show that incumbent firms are the main contributors to the evolution of labor share in the manufacturing sector during the sample period, with their contribution to total labor share changes exceeding four times the combined contribution of entering and exiting firms. Third, decomposition results of the wage-to-sales revenue ratio indicate that understanding the significant slowdown in per capita sales growth relative to per capita wage growth for incumbent firms after 2007 is key to exploring the driving factors behind the U-shaped reversal of labor share during the sample period. Fourth, structural estimation results show that demand-side factors, represented by markup rates, can only explain a small portion of the changes in labor share, while production-side scale effects are not the main drivers of labor share changes. Considering all evidence, this paper argues that biased technological progress or changes in labor market institutions are likely the key factors behind the reversal of China's declining labor share trend after 2007.
The potential contributions of this paper are threefold: First, it provides new micro-evidence for the U-shaped reversal of China's labor share based on a large-sample firm database. Second, it broadens the approach of analyzing and evaluating the driving forces of labor share by decomposing them into production-side and demand-side based on firm optimization behavior and constructing a structural estimation system to separate the effects of different factors. Finally, it excludes the possibility of production-side scale effects and demand-side product market power acting as primary influencing factors. This notably differs from recent conclusions on the driving forces of U.S. labor share, which found demand-side firm market power to be the main cause.
It should be noted that as an initial attempt to explore the evolution of China's labor share and its underlying driving factors from a micro perspective, this paper has evident limitations and room for improvement. First, we were unable to directly estimate labor-augmenting productivity, thus limiting our ability to further discuss its mechanism of influencing labor share in depth. Second, our model does not consider labor market frictions, making it impossible to directly evaluate the impact of labor market institutional factors on labor share. How to simultaneously identify multiple dimensions of firm heterogeneity, such as the direction of technological progress, product market monopoly power, labor market monopoly power, and labor adjustment costs, in one comprehensive model and directly assess their impact on Labor share remains a challenging issue and a worthwhile direction for future research.
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Received: 22 November 2023
Published: 01 August 2024
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