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An Empirical Analysis on the Changes of China’s Labor Share

Author: HuangJiaLu
Tutor: ZhuJing
School: Nanjing Agricultural College
Course: International Trade
Keywords: labor share average human capital technological progress capital-labor ratio foreign direct investment
CLC: F224
Type: Master's thesis
Year: 2010
Downloads: 41
Quote: 0
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Abstract


Over the past decade, Chinese economy has maintained a good momentum of fast development, real GDP increases rapidly with an average annual growth rate of 10.74%. Calculated by purchasing power parity, real GDP reaches up to 7.1 trillion dollars, ranked 2nd in the world after the United States (World Bank,2007). However, the speed of people’s living standards has not kept up much of the brisk pace of economic growth. The average annual growth rate of labor income for total labor population lagged by 2.12 percentage points of economic growth. Labor income accounted for the proportion of gross national income declined year by year, from the summit of 53.4% in 1996 to the new low of 39.7% in 2007, with an average annual decrease rate of 1.25%.Rapid decline in the share of labor income have attracted great attention of scholars. Academic research on labor share mainly includes three aspects:the estimation and volatility analysis of actual share of labor income; the reasons for the decline in the share of labor income; the impacts of the decline in the share of labor income. Among them, the actual level of labor share and the adverse effects it brings have reached a consensus by all, whereas the reasons presented by different scholars which induced the decline in labor share have not reached the same conclusion yet. In addition, the rapid decline in the share of labor income is the phenomenon only appeares over the past decade. China’s labor share has kept relatively stable for a long period of time before that, and even shows a fast growth at the initial stage of reform and opening up. Therefore, it is necessary to make further investigation with an effort to dig the nature behind the phenomenon of the changes in the share of labor income for a long time span. Because seeking the real reasons for the overall changes is the most effective way to put forward sharp suggestion in the direction to increase the share of labor income.Based on previous research, this paper converses the study of labor income in the proportion of gross national income to the study of labor and capital relative share, relaxes the assumption gradually along the three stages of factor distribution theories and introduces human capital, an important factor that exert a huge impact on the changes in the share of labor income, then distinguishes the different mechanisms and extents different factors exert at different stages, thus explores the most effective method which can help maintain the stability of labor income. This empirical study finds that investment in human capital will help improve the share of labor income, but its role in the marginal benefit for labor share in recent years have decreased. The most likely reason which led to China’s rapid labor share decline is the rapid increase in capital-labor ratio caused by the factor market price distortion that derive from the blindfold competition of FDI attraction among different regions. The positive effect of human capital on labor share is not great enough to offset the enormous negative effect of high capital-labor ratio, as such, China’s labor share presents a gradual fall in recent years. This conclusion, on the one hand, can provide a reasonable explanation for China’s increased and then decreased labor share changing path. On the other hand, it also offers strong evidence for decision-makers to smooth the share of labor income from a new perspective by increasing human capital investment.Relatively stable share of labor income is not only the reliable guarantee for the steady and balanced growth of China’s economy, but also the important basis for the successful transformation of our country’s economic growth, and will have a wide and profound influence for the improvement of people’s welfare and the construction of harmonious society. The policy recommendation this paper proposed is of great importance for both practice and guidance:Only by changing the investment-led and export-oriented economic growth pattern and expanding investment in human capital can we elevate the share of labor income, maintain national long-term stability, expand consumption and domestic demand and eventually realize sustainable economic development.

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CLC: > Economic > Economic planning and management > Economic calculation, economic and mathematical methods > Economic and mathematical methods
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