The Effects Of Catching-up Behavior Of Local Government On Labor Income Share

Since the reform and opening-up, especially the middle 1990s, China's economy has achieved remarkable achievement. However, labor income share in this period had been declining. According to our calculation, labor income share declined from 54% to 39.74% from 1996 to 2007.In long term, low labor income share will do seriously damage to the healthy development of China's economy. Firstly, low labor income share has been declining, and at the same time capital income share keeps increasing, which will enlarge social income gap. Secondly, because the marginal consume propensity of labor income is higher than that of capital income, the decline of labor income share will restrict enhancement of final consumption. Finally, low labor income share will constrain the transformation of Chinese economy mode.This paper analyzes the effects of economic catching-up behavior of local government on labor income share.(1)Economic catching-up behavior of local government has deepened imperfect competition of products market, thereby affects the distribution share of production factors.In China, the deepening of imperfect competition in products market will make wage deviate from the marginal output, which eventually leads to the labor income share decline. (2)Economic catching-up behavior of local government has deepened imperfect competition of factor market. In order to obtain limited economic resources, local government tends to set preferential policies to protect capital rights and weak labor rights, which determines a wide gap between capital and labor when production factor distributed economic achievements.(3)The ultimate goal of economic catching-up behavior of local government is to get high-speed GDP growth, which makes the local government develop capital-intensive industries with great enthusiasm and relatively ignore its own comparative advantage of resource endowment structure. This behavior largely leads to the excessive capital deepening, which may deviate from the orbit of factor endowments structure at present, and result in labor income share decline.By applying provincial panel data in China, This paper makes empirical analysis on the effects of economic catching-up behavior of local government on labor income share.The empirical results show that economic catching-up behavior of local government is an important reason for the labor income share decline, which certifies the effects of economic catching-up behavior of local government on labor income share from quantitative analysis.On one hand, under the Chinese special economic decentralization mode, the economic catching-up behavior of local government caused by competition among local governments, deepens imperfect competition of products market and factors market. On the other hand, because of the ignoring of own comparative advantage in resources endowment structure, local government prefers to develop capital-intensive industries and it brings excessive capital deepening, which also makes labor income share decline.