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The Labor Share Question in China

In this study I explore why China’s labor share measured by the conventional approach experienced a major decline over the period from the mid-1990s to the outbreak of the global financial and economic crisis in 2008. I adopt a Marxian approach to address this question. Following the Marxian approach, I focus on how the power relation in the sphere of production affects labor’s share. I argue that major changes in the power relation that took place during the transition of China’s economic system have played a crucial role in the changes of distribution. To this end, I build homogenous series of labor’s share measured by the Marxian approach. This measure changes following an inverse-U shape over the reform era. Further, I analyze the relationship between labor’s share measured by the conventional approach and that measured by the Marxian approach with the cointegration method, which shows that there is a long-run relationship between them. I divide the reform era into two stages according to the Marxian measure. I find that, in the first stage (from 1978 to the early 1990s), resulting from the power relation between the state, cadres and workers, labor’s share continuously increased, which led to recurrent inflation and squeezed profits. In the second stage (from the mid-1990s to 2008), the state launched a series of reforms to resolve these problems, resulting in the commodification of labor power and the division between cadres and workers, which repressed the power of workers and caused labor’s share to decline. Based on the historical analysis of the power relation during the transition process, I provide an econometric analysis of the determinants of labor’s share measured by the conventional approach over the reform era, using region-level data. I find that there is a U-shaped relationship between the bonus-wage ratio and labor’s share in the first stage; also, variables that reflect the power relation (reserve army effect, fallback position, and management-worker inequality) in the second stage have significant effects on labor’s share. Both macro and micro evidences support that the power relation is a crucial factor in the determination of labor’s share.