Factor Misallocation and Declining Labor Income-Share in China

Songtao Wang, Tristan Kenderdine, Qishui Chi

Abstract


In China’s present economic development, factor misallocation and labor’s low income-share both are important and interrelated, with factor misallocation being an important reason for the decline in China’s labor income-share. Theoretical modeling demonstrates that if capital-labor is substitutable, the factor misallocation will lead to a decline in labor income-share. Empirical studies, using 2001-2013 provincial panel data show that factor misallocation significantly reduces labor income-share, even after controlling for other factors that affect the labor-share. The conclusion is both significant and robust. Therefore, economic policy which optimizes factor allocation will improve labor’s income-share.


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DOI: http://dx.doi.org/10.22158/jepf.v3n2p188

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