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Investment incentives and labor share: evidence from accelerated depreciation policy in China

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  • Lexin Zhao
  • Qianbin Feng
  • Wen-Quan Hu

Abstract

This paper studies the impact of Chinaʻs accelerated depreciation policy (ADP) that was enacted in 2014 on labor share. We explore a firm-level dataset from Chinaʻs industrial enterprise database and estimate the policy effects using a difference-in-differences framework. We find that the ADP apparently reduces the labor share of the treated firms compared to the control firms, which is a net effect jointly driven by the capital deepening and skill structure upgrading channels. Among these two channels, the former is dominant and has negative effects on labor share, while the latter is positively related to the labor share. We also demonstrate that the firms with less financial constraints experience a more profound capital deepening process and a larger decline in labor share after policy enactment. These results suggest that the widespread use of investment tax incentives may be one of the reasons for the decline in global labor share in recent years.

Suggested Citation

  • Lexin Zhao & Qianbin Feng & Wen-Quan Hu, 2022. "Investment incentives and labor share: evidence from accelerated depreciation policy in China," Applied Economics, Taylor & Francis Journals, vol. 54(41), pages 4751-4766, September.
    • Handle: RePEc:taf:applec:v:54:y:2022:i:41:p:4751-4766
    DOI: 10.1080/00036846.2022.2036320
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    Cited by:

    1. Cui, Guanghui & Zhang, Yi & Ma, Jingwen & Yao, Wenyun, 2023. "Does environmental regulation affect the labor income share of manufacturing enterprises? Evidence from China," Economic Modelling, Elsevier, vol. 123(C).
    2. Khurram, Muhammad Usman & Abbassi, Wajih & Chen, Yifan & Chen, Lifeng, 2024. "Outward foreign investment performance, digital transformation, and ESG performance: Evidence from China," Global Finance Journal, Elsevier, vol. 60(C).
    3. Xiao, Renrui & Xu, Pingguo & Huang, Baocong, 2024. "Tax incentives and firm social insurance contributions: Evidence from China," China Economic Review, Elsevier, vol. 86(C).
    4. Wang, Jiangyuan & Fan, Wenlin & Wang, Zhixiao, 2024. "Tax incentives and earnings management: A study based on accelerated depreciation policy in China," Economic Analysis and Policy, Elsevier, vol. 81(C), pages 281-296.

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