Abstract
This paper demystifies variation in labor’s share of national labor income in China from the perspective of the income gap. We extend the gross national labor income function by introducing a Gini coefficient to support our argument that the share of gross national labor income decreases with an increasing Gini coefficient. The hypotheses are tested using provincial data from 1996 to 2010: (1) the Gini coefficient’s ‘inverted U’ shape partially contributes to the U-shaped evolution of the labor income-share; (2) China’s 15 per cent decline in the labor income share can be explained by the widening income gap during that time.
Highlights
This paper demystifies variation in labor’s share of national labor income in China from the perspective of the income gap
We deduced the condition of individual marginal labor income decreasing through a neoclassical production model and constant elasticity of substitution production function
By estimating actual elasticity of capital-labor substitution in China based on provincial panel data from 1996 to 2010, we confirm that this substitution elasticity is greater than 1, which means that marginal labor income for workers in China is decreasing
Summary
This paper demystifies variation in labor’s share of national labor income in China from the perspective of the income gap. We propose a new method to calculate the influence that Gini coefficient variation exerts on national labor income and its share. We use the function to study the influence that the Gini coefficient variation exerts on national labor income and its share.
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