Dissertation > Economic > Economic planning and management > Labor Economics > Countries in the world of labor economic profile > China

Study on Measurement and Mechanism of Labor’s Income Share Movement in China

Author ZhouMingHai
Tutor XiaoWen
School Zhejiang University
Course Western Economics
Keywords Labor’s Income Share Raw Labor Trade Mode Firm Heterogeneity Ownership Structure
CLC F124;F249.2
Type PhD thesis
Year 2011
Downloads 644
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After more than 30 years of rapid economic growth since reform and opening up, structural imbalance has become the central issue in the process of China’s economic development. One of the most important aspects is that the structure of national income distribution shows an uneven trend. It can be illustrated clearly that the labor’s income share of national income has decreased for 10 years, from 59.3% in 1998 to 52.9% in 2007. The decreasing of labor’s income share has become a hot topic not only for public debate but also for academic research. This paper aims to investigate the movement of China’s national income distribution by using labor’s income share as the point of entry. The key research question is "What is the moving trend of labor’s income share since reform and opening up, and why it decreases continuously in the recent decade?" This paper will answer this question from three different levels (macro, meso, and micro) and three different perspectives (growth, transition and opening up) by breaking the core into four subordinate questions. (1) From the macro perspective, what is the impact of different growth rate of economic factors on the distribution of those factors? (2) From regional perspective, what is the effect of movement of economic and industrial structure on the decreasing labor’s income share? (3) From industrial perspective, how change of trade mode causes the decrease of labor’s income share? (4) From micro perspective, how firm heterogeneity affects the distribution of labor and capital within firms? The first chapter of this paper is introduction. The second chapter summarizes the theoretical and empirical literatures which discuss about labor’s income share of national income, and finds that existing researches need to be improved not only about the measurement but also in the theoretical explanation about the labor’s income share so that it leaves potential space for further research. Based on this, chapter 3 to 6 discuss about these four questions by building model, collecting data and analyzing data to study the determinants of the movement of labor’s income share. Finally, we will conclude our research, state the limitation of this research and point out the further research directions.Our main conclusions are in the following four main aspects:Firstly, we analyze the reason of uneven national income distribution pattern from macro perspective. By using individual level data, we divides labor into raw labor and human capital, and find the human capital’s income share has increased rapidly while the raw labor’s income share decreases steadily during 1988 to 2007. By using extended MRW growth framework, we find that the movement of China’s national income distribution pattern is closely related to the unbalanced growth of three factors which are physical capital, human capital and raw labor. The high growth rate of physical and human capital bring upward trend of their income share, while the stagnant state of raw labor will bring its income share to decrease rapidly. By using various sources of factor growth data from 1995 to 2007, we confirm the inference of the extended model. And we find that the steady growth of physical capital, the slowing down of the growth rate of human capital, and the negative growth rate of raw labor are the causes of decreasing labor’s income share of GDP during 1998 to 2006. The key reason of negative growth rate of raw labor and leaning of national income distribution towards capital is unmatched economic contribution and return of rural surplus labors. And we suggest that the main approach to achieve harmonious distribution relations is to raise the labors compensation of such people.Secondly, we explore the reason of movement of labor’s income share from regional perspective. By using 1978 to 2007 provincial panel data, we find that significant difference of labor’s income share exists among different regions, and the difference is correlated with industrial structure and economic development. By breaking the movement of labor’s income share into the movement of employment, compensation and output, we find the movement of compensation and output is relatively important, while the employment movement is less important. Regression analysis further indicates that the change of industrial structure and economic development are the most important factors in explaining the decrease of labor’s income share, so that we support for "Kuzenets" instead of "Kaldor" Stylized Facts.Thirdly, we discuss the reason of movement of labor’s income share from industrial perspective. By decomposing the labor’s income share in the industrial sector during 1993 to 2007, we find that the movement of industrial structure can not fully explain the recent declining trend of labor’s income share in the industrial sector. Our research indicates that technology upgrading and decrease of monopoly power will impose a decrease on labor’s income share. Regression in different stages shows that the changing of trade mode is main reason for declining labor’s income share. In the time of import-export related processing trade in Pearl River delta, import penetration rate promote labor demand thus raise labor’s income share. While, in the time of import-oriented processing trade in Yangtze River delta, the simultaneous decline of import penetration rate and labor’s income share is the result of lowering raw material and labor cost from profit maximizing enterprises. Therefore, the import penetration has different mechanisms on labor’s income share in different stages.Finally, we investigate the determinants of labor’s income share from micro and firm-level perspective. We find that there are significant differences of labor’s income share among state-owned, private-owned and foreign enterprises. Thus we construct a theoretical model, and find that firm heterogeneity is the main reason for such differences. Therefore, by introducing firm heterogeneity, this paper discusses the impact of ownership restructuring of state-owned enterprises, privatization, and entry of foreign investment on labor’s income share in a general frame work. We claim that change of ownership structure will reduce factor distortion and promote economic efficiency, which in turn will impose a positive and transitory impact on the decreasing labor’s income share. By using the World Band Enterprise Survey data, we can test mechanism of factors that affect on the labor’s income share directly. By tracing time series changes of state-owned enterprises, we actually find that their production efficiency rises dramatically two years after the ownership restructuring, which brings significant drop of labor’s income share. By investigating government and firm relations, we find the proof that there are remarkable competition effects among local government in attracting foreign capital in order to pursue their GDP growth. We find labor’s income share of exporting firms are significantly lower than that of non-exporting firms, indicating that export will have a significant and negative impact on labor’s income share. We explain that the reason for the unfit of neoclassic trade theory prediction for China may lie in the "foreign investment leaded" feature of our export enterprises.Although our research discusses the decrease of labor’s income share of China’s national income distribution from different angles and perspectives, it has coherent policy implications. Firstly, we should combine the production and distribution process together for fully understanding China’s national income distribution pattern, and we shall not do separate analysis in the research. It also means that in making policies that aims to improve income distribution we should avoid paying more attention on the distribution problems than on the production issues. Secondly, we should relate the movement of labor’s income share with China’s economic transition and opening up, because they are the main reasons for the uneven distribution between labor and capital in China. Finally, the decrease of labor’s income share can not only be a result of accelerating economic efficiency, but also a result of stagnant growth of labor’s compensation. The government should not interfere in those impacts from improvement of economic efficiency, but should adjust those policies that will distort factor distribution which impedes the growth of labor’s compensation.For methodology, the research basically follows three steps which are measurement, decomposition, and explanation to elaborate the analysis. Thus the innovation and contribution of this paper lies in three aspects:(1) Although the decrease of labor’s income share is considered as the an indisputable fact, the measurement of labor’s income share is still inaccurate. We use employment related information to revise the inconsistency of statistical caliber, forming a complete regional and industrial panel data of labor’s income share, which may be helpful for the further research about China’s national income distribution. (2) Compared with other literatures, we decompose labor’s income share from different angles, which help us to better analyze the reason and mechanism of the movement of labor’s income share. In the third chapter, we divide labor into raw labor and human capital which lead us to discuss the dynamic relationship between growth and distribution of economic factors. In the fourth chapter, the movement of labor’s income share divides into the movement of employment, compensation and output so that we can analyze the three channels which other factors have impacts on labor’s income share. (3) In explaining the determinants of movement of labor’s income share, this paper especially emphasizes on the impacts of opening up. The explanation of changing trade mode as the reason of decreasing labor’s income share in the industry sector is fairly an explanation closely relates to real feature of China. The explanation of impacts of ownership structure on China’s labor’s income share by introducing firm heterogeneity is an implication of recent research findings and providing new perspectives.

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