Is China’s Economic Growth Profit-led or Wage-led?-A Theoretical Inquiry and Empirical Study on the Impact of Labor Share on Growth

Liu Dun 1, Shi Zulin 1 and Lin Daidai 2

1 School of Public Policy and Management, Tsinghua University, Beijing, China
2 School of Economics and Management, Beijing Jiaotong University, Beijing, China

Abstract:  The paper makes a comparative review and evaluation of different theories  on impacts of the distribution of labor and capital income on economic growth as well as criticism of the mainstream theories and suggests using Bhaduri-Marglin model as the theoretical basis for relevant research. By formulating the econometric model and analyzing time series data from 1978 to 2012, the paper makes an empirical research into the impact of labor share on economic growth in China. It has discovered that the positive effect of labor share on consumption demand growth in China outweighs its negative effect on investment and net export growth, concluding that growth in China is wage-led at present. That may mean that (1) increasing labor share promotes growth and the goals of equality and efficiency supports each other; (2) the key to “stabilizing growth, expanding domestic demand and optimizing structure” lies in establishing a set of pro-labor institution and regulation tools.

Keywords: labor share, labor-capital distribution, factors income distribution, economic growth, wage-led growth, effective demand

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