Foreign Trade、Technical Progress And China’s Labor Income Share

Since the implementation of the policy of reform and opening up, China has been merging into the integration of the world economy at an increasingly rapid pace. So far, China’s Gross Domestic Product has become the second largest in the world, following the USA. Accompanying with the rapid development of China’s economy, the performance of China’s Labor Income Share (LS) has been worrisome. China’s Labor Income Share has been descending in a very long time, worst of all, it descended in a roll from the year of 1996 to 2005.Based on China’s provincial data of 1978-2012, we study the impact of foreign trade and technical progress on China’s Labor Income Share. Theoretically, foreign trade influences China’s Labor Income Share through the following methods:(a) technical progress; (b) the negotiating power of labor; (c) factor endowment. Besides, the impact of technical progress on China’s Labor Income Share depends on the deviation of technical progress and the elasticity of substitution between capital and labor.Based on theoretical analysis and former articles and studies, we build a basic regression model, and then, we test its robustness using the multi-collinearity test, endophytism test and considering the impact of abnormal observations and another measurement of Labor Income Share. The endophytism test includes two methods: Instrumental Variable Method using the lagged values of endogenous variables as instrumental variables and system Generalized Method of Moments of dynamic panel model. The conclusions are as follows:(a) foreign trade restrains China’s Labor Income Share, the reasons are:On the one hand, since the implementation of reform and opening-up, especially since 1990s, the capital intensity of China’s exports has been increasing. Since 2005, capital-intensive products account for the majority of China’s exports, which violates China’s comparative advantage hence decreasing China’s Labor Income Share. Furthermore, except for the fact that labor-intensive products account for the majority of China’s exports for 1990-2004, the labor intensity keeps declining while the capital intensity keeps increasing. As a consequence, the demand for capital caused by export increases faster than that for labor, which improves the relative price of capital than labor, hence the capital income share. Besides, the deterioration of terms of trade of China’s traditional exports is another crucial factor contributing to the decrease of China’s Labor Income Share. On the other hand, processing trade featuring imports of capital-intensive intermediate products has accelerated China’s structural unemployment, (b) Technical progress improves China’s Labor Income Share, because China’s technical progress is capital-biased and its labor and capital are complementary, (c) Raising capital intensity can improve China’s Labor Income Share, (d) With the increase of GDP per capita, the trajectory of China’s Labor Income Share appears to be a U-curve. Based on our analysis, the shreshold of China’s GDP per capita is $2968 (calculated with price and nominal exchange rate of 2000). Hence, we think that China’s Labor Income Share has arrived at the increasing part of the U-curve. (e) The development of primary and tertiary industry improves China’s Labor Income Share, but that of secondary industry is otherwise. This is because that the Labor Income Share of primary and tertiary industry is larger than that of secondary industry, (f) Financial revenue squeezes out China’s Labor Income; and fiscal expenditure effectively improves China’s Labor Income Share, which proves the strong effect of Chinese fiscal policy on income redistribution.Based on the conclusions, we advise that:(a) Advance the reform of education system, encourage and develop comprehensive universities as well as institutions of skills education, hence, promoting the diversification of talents, raising the ratio of skilled labor and eventually absorbing the job opportunities created by foreign trade, (b) Encourage self-innovation and enhance the co-operation between colleges and corporations. (c) Persist in taking economic construction as the center and promote economic development. (d) Optimize the industrial structure, encourage and develop modern service industry. (e) Adjust the fiscal revenue and expenditure reasonably, and enhance the government’s intervention on income distribution.