The Puzzle Of Decline Of China’s Labor Income Share:Market Mechanism And Institutional Causes

From the statistical data,China’s Gini coefficient has exceeded the warning line of 0.4.The increasing income inequality on the hand has a directly impact on people’s subjective well-being,on the other hand,has a significant impact on the transformation of the economic structure and economic growth,and relates to social stability and political issues.In reality,the increasing income inequality shows obvious unfairness.Although the old saying:"inequality rather than want is the cause of trouble",however under careful scrutiny,"injustice rather than inequality is the cause of trouble" may be more in line with the reality of contemporary China.Because of our concern of fairness in distribution process and the high correlation of labor income share and income inequality,this paper adopts the function distribution approach from two research approaches of income distribution field,this is the share of factor income in total output.The phenomenon of China’s labor income share continued to decline since the ninety’s caused more attention.On the other hand,the fifth of "Kaldor fact" which is economic theory is widely accepted said the labor income share is stable in the long run.This paper’s purpose is to explain the "puzzle of decline of China’s labor income " which is not conform to economic theory.In this paper,we treat technological bias as the market factors which affect labor share,based then,considering institutional factors such as product market power,financing environment and labor bargaining changes which affect the movement of labor income share.This paper attempts to answer the following questions:1 The stylized facts of the level and changes of China’s labor income share.2 Whether technical progress bias is the main cause of China’s labor income share decline and what is the mechanism.3 In the changes of China’s labor income share which part is fair and reasonable?Which part is unfair?4 What are the institutional factors which causes the China labor income share level low and falling,how does them work?Based on the GDP income accounting data from national macro level,provincial level and industry level,and micro enterprise data,after calculation,we confirm the basic facts of the overall downward trend in the share of labor income.International data Comparison found that as the share of labor income of the household sector is seriously overvalued so that the total labor income share also overvalued.China’s labor share in non-financial corporate sector is relative lower than international data.Decomposition for the price and quantity of labor’s share shows the return on capital is high,and the volatility of labor share is more from the relative factor price,rather than the relative quantity of factors.The industry decomposition for labor share show that change of labor share within the industry is the main cause of the overall labor share changes,and the change of industrial structure is a secondary reason.Under the assumption of complete competition market and constant returns to scale in production,labor share is equal to the output elasticity of labor.So the basic market power which affect labor share is technological changes which related to production function and changes in the factor quantity.Starting from demand side and supply side of production factors(capital,skill labor,un-skill labor),we analyze the pricing problem of production factors,and labor income share and wage inequality which formed by factor price and factor quantity.What related to factor demand is the alternative or complementary relationship between different production factors(used the elasticity of substitution to characterize)and technical changes(with biased technical progress to describe).What related to factor supply is relatively scarce of factors(the ratio of skill and un-skilled labor supply,capital labor ratio).The equilibrium price derive from supply and demand for production factors interacting with each other is the wage rate and the rate of return of capital,then can get the labor income share and wage inequality(i.e.skill premium).The elasticity of substitution,technological direction,factor scarcity either will cause change in the labor income share and/or wage inequality changes.Further,through the firm’s technology choice behavior the technology bias is endogenous in factor prices and factor scarcity,and factor scarcity also is endogenous in factor prices by the worker’s human capital investment decision,so the technical properties,relative factor supply and equilibrium price of factors is a system which together change.This paper indicates that China’s technological change is biased to capital since ninety’s,the elasticity of substitution between capital and labor is less than 1,the effect of technological progress on labor share is negative.This paper regard the labor share under complete competition market assumption and constant returns to scale assumption(i.e.the output elasticity of labor)as the fair labor share.Estimate the output elasticity of labor using the industrial enterprises data,compare with the actual labor income share.It is found that the actual labor share is less than the output elasticity of labor,and the difference is enlarging.We can get marginal productivity of labor using elasticity of output of labor and output per capita data,also compared marginal productivity of labor with actual average wage of the enterprises,found that actual wage is less than the marginal productivity of labor.Correspondingly,the actual return rate of capital is greater than the marginal productivity of capital.Then this paper explore the system causes of the fact actual labor income share is lower than the labor output elasticity from the firm level,these factors include markup,financing environment,labor bargaining power.Administrative monopoly or enterprise innovation enables enterprises to obtain pricing power in the product market,so that they are able to obtain excess profits,if most of the excess profits attributable to the capital,then markup decre,ase labor share.The financing constraints whose specific form is difficult to obtain loans or high interest rate makes enterprises have a stronger incentive to suppress the labor cost,and keep the earnings of this period as savings to finance the investment of next period,and the possibility of suppress labor costs depends on the bargaining power,and the cost of lowering wages may reduce the degree of the worker’s effort so that reduce output.Dual economic transformation cannot explain why wages are lower than marginal productivity,in reality wages and employment are determined by the negotiations between workers and enterprises,how to allocate excess profits determined by the bargaining power.Firm level empirical evidence shows that the effect of product market monopoly,financing constraints on the labor income share is negative;the effect of union expense on wages and labor income share are both positive;the effect of adjustment of the minimum wage standard on wages and labor income share are both positive,the effect on employment is not significant in the short run,but is negative in the long run.Finally,a general equilibrium model containing technical bias,markup,financing constraints and bargaining power is constructed.The utility function adopts the DS form,and the demand elasticity of the product reflects the market power,so the markup is introduced into the model.Adding a parameter to the corporate lending rate indicates the additional cost of capital to reflect the financing constraints.Nash bargaining solution is used for the distribution of the total surplus.The main innovations of this paper are:1 the innovation of analytical framework.Divide the factors which lead to the decline of labor income share into market factors and institutional factors.We regard the decline in labor share which is caused by technology bias which represent the market mechanism as normal economic structure adjustment;and regard the decline in labor share which is caused by institutional factors such as markup,financing constraints,bargaining power as distortion where is not only detrimental to fair but also bring efficiency loss.2.Construct a general equilibrium model containing output elasticity,markup,financing constraints and bargaining power,using mathematical models to describe how these factors affect the labor share,and deduce the direction and degree of the effect.3.From the enterprise level is proposed to understand the enterprises to increase the value distribution of a kind of new angle of view:workers first made the reservation wage,capital owners first obtain the normal capital return rate,then corporate excess profits allocation by bargaining ability decided,labor share is with excess profits of the size and excess profit how to allocate the.Price addition and financing constraints are related to the former,labor bargaining power and the latter related.4 illustrate the mechanism of how markup and financing constraints affect labor share in theory,and the empirical test using enterprise data confirm the mechanism.