Labor’s Share of Income: Another Key to Understand China’s Income Inequality

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Another example is Liuye, a construction company founded in in Luoyang, Henan Province. Since the early s, most of the production workers were laid off, and only the management, skilled workers, and some office staff were retained. Since then, Liuye established a construction team for each project; each construction team had a manager and some skilled workers from Liuye, while the rest of the workers were all migrant workers. With this regime, Liuye could make full use of the low wages and flexibility of migrant workers, which was impossible before the layoffs took place.

Causes of Income Inequality

These layoffs resulted in not only the transfer of migrant workers, but also the expansion of the service sector. During the period —, the share of industry in total employment decreased from During the same time, the share of the service sector in total employment increased from The China Urban Labor Survey recorded job changes due to layoffs for a sample of people: beforehand, Another example is the development of the service sector in the Tiexi district in Shenyang, Liaoning Province.

Before the s, several large-scale industrial SOEs were located in Tiexi, and thousands of workers lived nearby. The massive layoffs triggered continuous conflicts between those enterprises and the laid-off workers.

Worried about the social instability caused by the concentration of those conflicts, the local government decided to relocate those enterprises to remote and scattered areas and then introduce commercial and real estate programs into Tiexi, even though some of the land was polluted by previous industrial production and thus unsuitable for non-industrial usage.

Only a decade later, one can hardly tell from the appearance of the city that Tiexi was previously an industrial area. These examples have shown how sectoral changes intertwined with the dynamics of class conflicts in China. In this perspective, this relationship is similar to that in the history of world capitalism: industrialization in the early period of traditional capitalist countries separated means of production from laborers and forced the proletarianized to work in factories as free labor; financialization in the late period of monopoly capitalist countries strengthened the power of financial capital and dragged the whole economy into the cycles of boom and bust.

Along with industrialization and financialization, major changes took place in distribution, but those changes resulted from class struggle, not from the sectoral changes. First, the agricultural income of rural households is treated as the compensation of employees, which needs to be discussed. Second, the income of the self-employed is also treated as the compensation of employees, but the self-employed sector is quite diversified: a great number of self-employed units are based on household labor, while others may hire workers, and some may hire more than a small enterprise hires.

However, since we lack macro-level data on the salaries of managers, we will discuss some micro-level evidence at the end of this section. The dashed line LS1 treats the self-employed sector as a capitalist sector. The actual scenario should lie between LS1 and LS2; fortunately these lines are quite close to each other. Different assumptions have been used for the robustness check, and the general results in Chart 2 are robust.

The solid black line LS3 in Chart 2 excludes both the self-employed sector and the rural household sector, which also clearly shows a downward trend that began in This trend becomes flatter than what the other two lines show. To explain this, we need to analyze the social function of agricultural income in China. Although agriculture is mainly organized by household labor, it is not separable from the capitalist production which dominates the non-agricultural sectors. One crucial reason is that agriculture and the rural society provides the conditions for the reproduction of labor power. For rural households, agriculture in most cases is merely one of their income sources.

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Rural households are semi-proletarianized as they are participating in both household-organized agricultural production and wage employment. In , nearly one-fifth of rural laborers were working in TVEs; in , this number became one-third. In this context, capitalists are not required to pay wages sufficient for the laborers to reproduce the labor power in the urban areas, and the agricultural income and the rural society becomes indispensable for the reproduction of labor power of their families.

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Buy Hardcover. Buy Softcover. FAQ Policy. About this book This book analyzes the decrease in labor share in China, which is a ratio of national income distribution to capital at three different levels macro, meso, and micro and from three different perspectives growth, transition and opening up.

At the same time, IT-related occupations, including programmers and IT managers, contributed about one-fifth of total employment growth in the financial sector. While structural factors matter, the relatively large increase in financial sector output and profits is also due to the way in which financial sector output is measured. The approach in the national accounts both in Australia and overseas is to measure financial sector output indirectly through imputed service charges known as financial intermediation services indirectly measured FISIM.

FISIM is estimated as the spread of the average loan rate over some reference rate multiplied by the total stock of loans less the spread of the average deposit rate over the same reference rate multiplied by the total stock of deposits.

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The reference rate is the midpoint between the average interest rate on loans and deposits. For the banks, FISIM is essentially the spread between the interest rate on loans and deposits multiplied by the size of the banks' balance sheets as measured by the stock of loans and deposits.

For example, an increase in housing prices will be associated with higher demand for mortgage debt and increase the size of bank balance sheets which, in turn, will increase the measured value of financial services. An increase in the spread between the interest rate on loans and deposits can also lead to an increase in the measured value of financial sector output on this basis. Putting aside some of the challenges associated with measuring financial sector output, an alternative source of information is the publicly listed banks' reported profits.

Published annual reports indicate that the banks' profits have risen strongly relative to GDP over recent decades and, in fact, by more than that recorded in the national accounts. This suggests that structural factors such as financial sector deregulation and disinflation may have contributed to the rise in the share of financial sector profits, despite also raising competition in the sector Gizycki and Lowe An analysis of the trends in the aggregate labour share may mask important trends occurring at a more granular level within industries.

Excluding the financial sector, the aggregate labour share has been unchanged since Apart from finance, the industries that have experienced the biggest falls in the labour share include utilities, mining and transport. Perhaps surprisingly, the long-run shift in economic activity away from manufacturing and towards services has had little effect on the aggregate labour share.


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  • This is because manufacturing and services had very similar labour shares in the early s, so a shift in resources between the two sectors has had little discernible effect. Guided by economic theory and overseas research, three leading explanations for trends in factor shares across industries include: [7].

    Labor’s Share of Income

    Overseas research has indicated that technological advancement can affect aggregate factor shares. Examples of such technical progress could include the development of computer software that makes hardware work more efficiently. Technological progress may have also affected the aggregate labour share by lowering the relative price of investment goods.

    Chart 1. Raw Measurements of Labor’s Share, 1978–2012

    This lowers the cost of capital for firms and provides an incentive to replace labour with capital. So the rapid advance in information and communications technology, which underpins much of the decline in the relative price of investment goods over recent decades, may have reduced the labour share. Regression analysis indicates that the labour share has declined by more in industries experiencing faster productivity growth and larger falls in the relative price of IT goods. These relationships hold even when controlling for a wide range of other factors, such as demand conditions in the industry.

    There is a large body of international research looking at the effect of trade, and the rise of Chinese imports in particular, on the labour share of income.

    Labor Markets and Minimum Wage: Crash Course Economics #28

    But the existing research indicates that the effect of higher import penetration on the labour share is ambiguous. A key reason for this ambiguity is that higher import competition not only reduces employment and earnings, but also profits, which may imply a higher and not lower labour share. Over the past decade or so, there has been a decline in employment and labour costs in manufacturing industries that were most exposed to Chinese import competition, such as electronics, clothing and toys. But business profits have fallen by even more in these highly exposed industries.

    The net effect is that the labour share has actually risen in the most affected industries. If anything, the fall in the labour share in Australian manufacturing appears to pre-date the strong increase in Chinese imports by a few decades this is also true for many other industrialised countries where the labour share declined even more. In this earlier period, increasing globalisation was still part of the explanation, for example, by motivating the reduction in government protection, which coincided with a lower labour share in manufacturing through the s and s.

    Drivers of Declining Labor Share of Income

    The rise of China has also affected the aggregate labour share indirectly through its effect on the demand for Australian resources and hence labour and capital used in the mining sector. Following the emergence of China as a global exporter in the early s, the labour share in the mining sector declined because mining company profits rose more strongly than wages; but since then, the labour share has risen in the mining sector as both the terms of trade and company profits have declined.

    An alternative explanation for the decline in the labour share in some industries is that Australian workers have lost bargaining power. The implications of labour market deregulation for the labour share are unclear. Recent overseas research suggests that job protection deregulation reduces the labour share Ciminelli, Duval and Furceri But other studies suggest that the labour share declined by more in more regulated labour and product markets Ellis and Smith There is some international evidence to suggest a positive but weak link between a decline in unionisation and the labour share.

    In Australia, there has been a broad-based decline in union membership across industries over recent decades, but recent research suggests that there is little evidence of a link to wage outcomes Bishop and Chan This may be because actual union coverage of Australian workers has been little changed since the early s; union involvement in enterprising bargaining agreement EBA negotiations ultimately affects all employees on an EBA, and not just union members. This hypothesis states that lower labour shares within industries reflect the increasing dominance of a few large firms that produce a lot of output with relatively little labour.

    Any shift in economic activity towards these very productive firms could explain the observed decline in the share of income going to labour within industries. Research using detailed firm-level data finds some evidence for higher business concentration in Australia La Cava and Hambur Since the early s, there has been a shift in economic activity towards large firms. This is true across a range of industries, but is most notable in the retail trade sector.

    The four largest retailers in Australia now account for around one-third of total industry sales. Statistical analysis suggests that higher business concentration across industries has lowered the aggregate labour share since the early s. The aggregate labour share in Australia rose over the s and early s but has been on a gradual decline since then. In an accounting sense, the decline in the aggregate labour share over recent decades is largely because of a larger share of imputed income accruing to home owners, along with a lower labour share in the financial sector.

    The decline in the financial sector labour share, in turn, appears to be partly due to structural changes in the financial sector, such as financial deregulation, labour-saving technology adoption and high productivity growth. But it also may be affected by issues with measuring the output of the financial sector. At the same time, the aggregate capital share has risen. This is largely explained by rising profits accruing to financial institutions and rising rents paid to land owners. In turn, higher housing rents over recent decades appear to reflect a combination of higher-quality owner-occupied housing, lower interest rates and rising housing prices.

    Across the rest of the economy, there have been varying trends in factor shares that are largely offsetting. The labour and capital shares of income measure the fractions of domestic income going to labour and capital respectively.

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