Social Sciences in China (Chinese Edition)

No.12, 2015

The Question of Labor Share in China: An Estimate and Analysis Based on the Employee Economy and the Self-employment Economy

(Abstract)

Zhang Juwei and Zhao Wen

The debate over labor share in China originates to a large extent from the failure to distinguish between the employee economic sector and the self-employment economic sector. On the basis of this distinction, we have calculated output and factor scale for each sector and made an estimate of labor share. Our findings show that since 1978, the overall share of labor in the employee economy has shown a downward trend. Assuming that the substitution elasticity of relaxation factors is 1, we use a production function to provide a theoretical estimate of the labor share of the employee economy and its changes. This estimate shows a result consistent with actual accounting, indicating that the decline in labor share has its own internal logic whose causes are to be found in the changes in its mode of development. A further estimate of the substitution elasticity of capital and labor factors gives a result less than 1, which implies that the cause of the reduction in labor share has to be sought in the deviation of factor prices from marginal output. Therefore, the reform of income distribution and the development of a fair and reasonable distribution pattern in China require not only a change in the mode of economic development but also the rectification of distorted factor prices to improve the formative mechanism of the factor price market.