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The Aggregate Labor Share and Distortions in China

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  • Xiaoyue Zhang
  • Junjie Xia

Abstract

This paper shows that in an economy where distortions prevent firms from using their profit-maximizing amounts of capital and labor, removing these distortions can generate both an efficiency gain and a higher aggregate labor share. We use firm-level data on Chinese manufacturing, mining, and public utilities in 2005 and estimate a general equilibrium model with heterogeneous productivity, technology, demand elasticities, and distortions across firms. We find that the distortions cause most firms to be too small. Removing them raises the aggregate demand for labor and, holding the aggregate labor and capital fixed, increases the wage by 57%. Consequently, the aggregate labor share rises by 24 percentage points. Aggregate productivity quadruples.

Suggested Citation

  • Xiaoyue Zhang & Junjie Xia, 2025. "The Aggregate Labor Share and Distortions in China," Discussion Papers of DIW Berlin 2136, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp2136
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    JEL classification:

    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • D3 - Microeconomics - - Distribution
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • L6 - Industrial Organization - - Industry Studies: Manufacturing
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies

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