A New Explanation for Changes in China's Labor Income Share: Capital Heterogeneity

Abstract

In this paper, a two-sector general equilibrium model with Putty-Clay technology is constructed, and the characteristics of capital heterogeneity are depicted in the model in the form of capital goods productivity variance. Through the capital selection mechanism, the impact of capital heterogeneity on labor income share is explored. It is found that the inverted U-trend of relative capital heterogeneity in capital-intensive industries is the cause. Second, the mechanism of capital heterogeneity affecting labor income share lies in the capital goods selection mechanism. With the increase of capital heterogeneity, the investment uncertainty faced by enterprises is strengthened. When choosing capital goods, enterprises will diversify investment and reduce capital intensity. After capital goods are put into production, firms will use high-productivity capital goods and shut down low-productivity capital goods, leading to a decline in capital utilization, the increase in total factor productivity, and the increase in output. Third, in the capital-intensive sector, the increase of capital heterogeneity will reduce, while in the labor-intensive sector, the opposite effect is presented. The new characteristics of Chinese capital and the change of labor income share, and has important policy reference significance for promoting.