Automation and Inequality in China

In transitional economies like China, comparatively low real wages imply sub-OECD labor and skill shares of value added and comparatively high capital shares. Despite rapid real wage growth, however, rather than converge toward the OECD, China’s low-skill labor share has been falling, due to structural and technical change. Here this dependence is quantified using an elemental national model with three households. Since 1994, a third of the total change in the Gini coefficient is estimated to be due to structural change and the rest to mainly skill-biased technical change. Widely anticipated further twists away from low-skill labor toward capital are then examined, assuming downward rigidity of low-skill wages and transfers that sustain low-skill welfare via taxes on capital income. The potential is identified for unemployment to rise extraordinarily, with negative effects mitigated if the population declines or if the share twists are accompanied by very strong total factor productivity growth.