Financial Development And Income Distribution:Theoretical Analysis And Empirical Evidence From China

During more than three decades of reform and opening up, China’s economy has made remarkable achievement, per capita income is steadily rising. However, income gap is widening and labor income share is falling sharply at the same time.It has threatened China’s long-term growth and social stability. As the old saying goes,"Don’t worry about the amount of resources, worry about the distribution." How to make more people share the fruits of economic growth? Naturally, the issue has become the focus of recent debate. As the lifeblood of the economy, finance has played a significant role in promoting economic growth. Also, finance is a kind of distribution mechanism, it has the function of distributing and redistributing resources and wealth. This dissertation aims to indicate the relationship between financial development and income distribution, investigate the impact of financial development on China’s income distribution from the theoretical and empirical perspective. If the fast financial development is one of the important factors for changes of income distribution, to understand the mechanism、formation process and do some quantitative analysis will undoubtedly help us recognize the financial cause and evaluate the role of finance in economic development.This dissertation is made of eight chapters.Chapter1brings forward the research questions and Chapter2reviews the theoretical and empirical literatures. In Chapter3, we analyze theoretically how financial development affects income distribution. Chapter4goes into detail to measure financial development, income inequality and labor income share, which serve as a concrete base for later use. Chapter5to6use Chinese provincial-level panel data to investigate the finance-inequality nexus. Chapter7focuses on the impact of financial development on factor income distribution. Conclusive remarks and policy implications are presented in Chapter8.There is no consensus on the relationship between financial development and income distribution. Basing on the existing literatures, we combine China’s financial institutional arrangement and the state of financial development to analyze how income distribution is affected by financial development in the micro and macro levels. For the micro level, individuals’ initial wealth are different, they face different credit constraint and financial service. Financial development will affect individuals’ investment decision and career choice, and the trickle-down effect of capital accumulation, thereby affect wealth distribution; for the macro level, it will affect the supply and demand in the labor market, meanwhile, financial repression and uneven financial development will widen income gap. Financial development is not perfect in China, it may not help to narrow income inequality.Basing on the theoretical analysis, we apply linear model to test the relationship between them. The results show that, it suggests a significantly positive correlation between financial development and residents’ income inequality. Higher degree of the competition in financial sector and the market-oriented credit allocation are associated with increases in Gini coefficient. If we get the conclusion only according to the results of linear model, maybe some important discovery will be missed. We continue to extend the study on its nonlinear effects in the sixed chapter. The results confirm there exist Kuznets effect between financial development and residents’ income distribution. It is that income inequality changes in a simulated inverted U-shaped curve as financial development is deepening. However, from an overall point of view, China’s financial development is sill at a lower level. Most provinces have not yet crossed the inflection point, they are still in the uplink interval of the curve. Furthermore, based on threshold regression model, we find that the distributional effect of financial development is closely related with the level of economic development, it shows non-monotonic dual-threshold characteristics in different regions. As the economy is developing, its positive effect gradually strengthen, and then tend to weaken.Income distribution has two dimension, that is, size of income distribution (residents’ income distribution) and functional distribution of income (factor income distribution). In the seventh chapter, we examine the impact of financial development on factor income distribution. The result shows that, financial development has a significantly negative effect on labor share. This explains the declining labor share from the perspective of financial development. In view of the reverse change in Gini coefficient and labor share, our finding will provide a deeper explanation for income inequality.On the basis of the conclusions above, we get some corresponding policy implications.To narrow income inequality, it is necessary to optimize the arrangement of financial system, make it easy for the poor to reach financial services, promote the competition in financial sector, gradually push forward the marketization process of interest rate, build a well-functioning capital market, and improve the policy-oriented financial system. Finally, the government should pay attention to the complementary match between finance and other economic variables.