Sectoral heterogeneity, industrial structure transformation, and changes in total labor income share

Abstract

• Build a multi-sector dynamic general equilibrium model to characterize the impact of sectoral heterogeneity on the industrial structure transformation and labor income shares, and then perform it with numerical simulations result. • Find that the changing direction of total labor income share is same as the labor share of labor-intensive industries. • Explain the “U-shape” trend of China's total labor income share changes. • Help to further understand the economic connotation of the time-varying elasticity production function model and the ongoing structural transformation of China's economy. In recent years, China's labor income share has undergone substantial changes and the evolution of income distribution is inseparable from the process of industrial structural transformation. From the perspective of sectoral heterogeneity, this study develops Ngai and Pissarides’ (2007) model, constructing a multisector dynamic general equilibrium model. We propose that technological progress or capital deepening will promote the flow of production factors among sectors, with the direction dependent on the substitution elasticity between products, sectoral differences in the rate of technological progress, factor output elasticity, and elasticity of factor substitution. This process of factor flow also causes changes in total labor income share, and the direction parallels the labor share of labor-intensive industries. Combining the development data of China's three major industries during different periods, the results demonstrate that in the industrial period, labor flows from the agricultural sector to the industrial sector and the total labor income share decreases; in the postindustrial period, labor flows from the industrial sector to the service sector and the total labor income share increases. The contribution of this study is in presenting a comprehensive and systematic examination of the impact of sectoral heterogeneity on industrial structure transformation and labor income share, which explains the U-shaped trend of China's overall total labor income share and also helps to further understand the structural transformation of the Chinese economy.