Regional disparity of laborʹs share in China: Evidence and explanation

Despite the “growth miracle” of recent decades, laborʹs share, i.e., the share of total labor compensation in GDP, has decreased in China. Laborʹs share is an important indicator of the primary distribution of national income, and its fall has drawn significant attention from researchers and policymakers. As Chinaʹs many regions have different development levels and economic structures, it is very likely that laborʹs share will differ across regions. Thus, it is important to examine the regional disparity of laborʹs share. In this paper, we develop a conceptual framework based on existing theories to identify the factors that influence laborʹs share. We, then, use Chinese provincial data from 1997 to 2007 to describe the regional differentials in laborʹs share and its evolution over the 10-year period and to explain regional disparity in laborʹs share. We take into consideration spatial correlations across regions and employ spatial cross-sectional and panel models in the empirical analysis. We found that industrial composition and ownership structure were the two key factors that influence laborʹs share. We also found that the average labor income was lower but laborʹs share was higher in western areas compared to eastern areas. The higher levels of laborʹs share in western provinces may be explained by a higher share of agricultural industries and state-owned enterprises, as agriculture and state-owned sectors tend to distribute more income to labor than to capital.