Road infrastructure and the share of labor income: Evidence from China’s manufacturing sector

Abstract

To shed light on the effect of public expenditure on the functional income distribution, this paper represents a first attempt to analyze the impact of road infrastructure on the share of labor income. Based on data from China, we initially find that improvement of the road infrastructure is negatively correlated with the share of labor income and that the results are robust to endogeneity checks. We then explore two transmission channels underlying this negative relationship. First, since road infrastructure leads to expansion of markets, it helps promote the mobility and bargaining power of capital, raising the share of capital income, especially under the current hukou system, which impedes labor mobility. Second, the share of labor income declines as an economy transforms from being labor intensive (dominated by the agriculture sector) to being capital intensive (dominated by the manufacturing sector). China has been undergoing industrialization, which is reinforced by the development of the road infrastructure, contributing to the decline in the share of labor income associated with structural transformation. Finally, when the two transmission channels are controlled for, road infrastructure is found to help raise the labor share and therefore reduce income inequality in China.