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Declining Labor Share: Is China's Case Different?

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  • Changyuan Luo
  • Jun Zhang

Abstract

This paper explores why labor share in China has declined since the middle of the 1990s. Existing literature usually ascribes the labor share decline in developed countries to biased technological progress. However, our investigation shows that China's case is different. Using a simultaneous equation model estimated with three‐stage least squares, we find that FDI, levels of economic development and privatization have negative effects on the labor share. The negative influence of FDI on labor share results from regional competition for FDI, which weakens labor forces' bargaining power. A U‐shaped relationship exists between labor share and the level of economic development, and China is now on the declining part of the curve. The negative effects of privatization on the labor share stem from the elimination of the so‐called “wage costs eroding profit” situation and the positive supply shock on the labor market.

Suggested Citation

  • Changyuan Luo & Jun Zhang, 2010. "Declining Labor Share: Is China's Case Different?," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 18(6), pages 1-18, November.
    • Handle: RePEc:bla:chinae:v:18:y:2010:i:6:p:1-18
    DOI: 10.1111/j.1749-124X.2010.01217.x
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    Cited by:

    1. Julan Du & Hongsheng Fang & Xiangrong Jin, 2013. "Chinese Political and Economic Governance System and the Imbalance between Consumption and Investment," Working Papers 232013, Hong Kong Institute for Monetary Research.
    2. Jingxian ZOU & Guangjun SHEN & Shen JIA, 2020. "How does labour share respond to risk? Theory and evidence from the Chinese industrial sector," International Labour Review, International Labour Organization, vol. 159(2), pages 259-281, June.
    3. Du, Julan & Fang, Hongsheng & Jin, Xiangrong, 2014. "The “growth-first strategy” and the imbalance between consumption and investment in China," China Economic Review, Elsevier, vol. 31(C), pages 441-458.
    4. Lu Ming & Zhao Chen & Yongqin Wang & Yan Zhang & Yuan Zhang & Changyuan Luo, 2013. "China’s Economic Development," Books, Edward Elgar Publishing, number 14502.
    5. Jing Ma & Qiuyun Zhao & Qing Li & Hao Yang, 2021. "Financial Constraints, Corporate Savings and Labor Income Share—Based on China’s Economic Transition," Sustainability, MDPI, vol. 14(1), pages 1-32, December.
    6. Chu, Angus C. & Cozzi, Guido & Galli, Silvia, 2014. "Stage-dependent intellectual property rights," Journal of Development Economics, Elsevier, vol. 106(C), pages 239-249.
    7. Angus Chu & Guido Cozzi & Yuichi Furukawa, 2015. "Effects of Economic Development in China on Skill-Biased Technical Change in the US," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(2), pages 227-242, April.
    8. Vipul Bhatt & Mouhua Liao & Min Qiang Zhao, 2019. "Government Policy and Land Price Dynamics: A Quantitative Assessment of China's Factor Market," Working Papers 2019-07-03, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    9. Mary O'Mahony & Michela Vecchi & Francesco Venturini, 2019. "Technology, Intangible Assets and the Decline of the Labor Share," Economic Statistics Centre of Excellence (ESCoE) Discussion Papers ESCoE DP-2019-17, Economic Statistics Centre of Excellence (ESCoE).
    10. Guerriero, Marta & Sen, Kunal, 2012. "What Determines the Share of Labour in National Income? A Cross-Country Analysis," IZA Discussion Papers 6643, Institute of Labor Economics (IZA).
    11. Mary O’Mahony & Michela Vecchi & Francesco Venturini, 2021. "Capital Heterogeneity and the Decline of the Labour Share," Economica, London School of Economics and Political Science, vol. 88(350), pages 271-296, April.
    12. Maria N. Ivanova, 2017. "Profit growth in boom and bust: the Great Recession and the Great Depression in comparative perspective," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 26(1), pages 1-20.
    13. Raihan, Selim, 2021. "Functional Income Distribution and Inequality in the Asia-Pacific Countries," MPRA Paper 110469, University Library of Munich, Germany.
    14. Chih‐Hai Yang & Meng‐Wen Tsou, 2021. "Globalization and the labor share in China: Firm‐level evidence," Manchester School, University of Manchester, vol. 89(1), pages 1-23, January.

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