IDEAS home Printed from https://ideas.repec.org/p/diw/diwwpp/dp2136.html
   My bibliography  Save this paper

The Aggregate Labor Share and Distortions in China

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://www.diw.de/documents/publikationen/73/diw_01.c.972444.de/dp2136.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Bond, Steve & Hashemi, Arshia & Kaplan, Greg & Zoch, Piotr, 2021. "Some unpleasant markup arithmetic: Production function elasticities and their estimation from production data," Journal of Monetary Economics, Elsevier, vol. 121(C), pages 1-14.
    2. John Haltiwanger & Robert Kulick & Chad Syverson, 2018. "Misallocation Measures: The Distortion That Ate the Residual," NBER Working Papers 24199, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ian Goldin & Pantelis Koutroumpis & François Lafond & Julian Winkler, 2024. "Why Is Productivity Slowing Down?," Journal of Economic Literature, American Economic Association, vol. 62(1), pages 196-268, March.
    2. Fieler, Ana Cecília & Harrison, Ann E., 2023. "Escaping import competition in China," Journal of International Economics, Elsevier, vol. 145(C).
    3. Monika Mrázová & J. Peter Neary & Mathieu Parenti, 2021. "Sales and Markup Dispersion: Theory and Empirics," Econometrica, Econometric Society, vol. 89(4), pages 1753-1788, July.
    4. Eisenberg, Tom, 2024. "Missing data and the effects of market deregulation: Evidence from Chinese coal power," International Journal of Industrial Organization, Elsevier, vol. 93(C).
    5. Geoffrey Barrows & Hélène Ollivier & Ariell Reshef, 2023. "Production Function Estimation with Multi-Destination Firms," CESifo Working Paper Series 10716, CESifo.
    6. Sebastian Galiani & Luis F. Jaramillo & Mateo Uribe-Castro, 2025. "Free-riding Yankees: Canada and the Panama Canal," Journal of Economic Growth, Springer, vol. 30(3), pages 339-382, September.
    7. Miller, Nathan H., 2025. "Industrial organization and The Rise of Market Power," International Journal of Industrial Organization, Elsevier, vol. 98(C).
    8. Nick Jacob & Giordano Mion, 2024. "On the productivity advantage of cities," Journal of Economic Geography, Oxford University Press, vol. 24(5), pages 679-705.
    9. Kosuke Aoki & Yoshihiko Hogen & Kosuke Takatomi, 2023. "Price Markups and Wage Setting Behavior of Japanese Firms," Bank of Japan Working Paper Series 23-E-5, Bank of Japan.
    10. Giroldo, Renato & Hollenbeck, Brett, 2021. "Concentration, Retail Markups, and Countervailing Power: Evidence from Retail Lotteries," MPRA Paper 109039, University Library of Munich, Germany.
    11. Amaresh K Tiwari, 2023. "Automation In An Open, Catching-Up Economy: Aggregate And Microeconometric Evidence," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 144, Faculty of Economics and Business Administration, University of Tartu (Estonia).
    12. Brugués, Felipe & Brugués, Javier & Giambra, Samuele, 2024. "Political connections and misallocation of procurement contracts: Evidence from Ecuador," Journal of Development Economics, Elsevier, vol. 170(C).
    13. Maurice J.G. Bun & Jasper Winter, 2022. "Capital and labor misallocation in the Netherlands," Journal of Productivity Analysis, Springer, vol. 57(1), pages 93-113, February.
    14. Paul Carrillo & Dave Donaldson & Dina Pomeranz & Monica Singhal, 2023. "Misallocation in Firm Production: A Nonparametric Analysis Using Procurement Lotteries," CESifo Working Paper Series 10485, CESifo.
    15. Michał Gradzewicz, 2022. "How do firms respond to demand and supply shocks?," KAE Working Papers 2022-075, Warsaw School of Economics, Collegium of Economic Analysis.
    16. Bento, Pedro & Restuccia, Diego, 2021. "On average establishment size across sectors and countries," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 220-242.
    17. Chen Yeh & Claudia Macaluso & Brad Hershbein, 2022. "Monopsony in the US Labor Market," American Economic Review, American Economic Association, vol. 112(7), pages 2099-2138, July.
    18. Filippo Biondi & Sergio Inferrera & Matthias Mertens & Javier Miranda, 2023. "Declining Business Dynamism in Europe: The Role of Shocks, Market Power, and Technology," Jena Economics Research Papers 2023-011, Friedrich-Schiller-University Jena.
    19. David C. Maré & Richard Fabling, 2019. "Competition and productivity: Do commonly used metrics suggest a relationship?," Working Papers 19_16, Motu Economic and Public Policy Research.
    20. Lorenz K.F. Ekerdt & Kai-Jie Wu, 2024. "The Rise of Specialized Firms," Working Papers 24-06, Center for Economic Studies, U.S. Census Bureau.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:diw:diwwpp:dp2136. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bibliothek (email available below). General contact details of provider: https://edirc.repec.org/data/diwbede.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.