China's Labor Income Share Decline

Using the1996-2007provincial panel data of China, we found that the local government fiscal self-financing deterioration, industrialization and the interaction term between fiscal self-financing and industrialization have significant negative effects on the share of labor incomes. And the logic behind it is the local government’ fiscal incomes don’t match with its own responsibilities, which leads to deterioration of fiscal self-financing. To improve its fiscal self-financing position, in the process of investment introduction, local governments give preferential conditions to attract capital-intensive industry, thus strengthen capital’s bargaining power over labor. Moreover, research on the union proves that labor union in China not only fails to enhance the bargaining power of workers, but has significant negative effects on the income share of labor, which directly explain the strong position of the capital-labor. Subsequently, we also found that the deterioration of the government fiscal self-financing deterioration will stimulate development of secondary industry and the interaction between the two has a significant negative effect on the labor share. We suggest that local governments face financial constraints, and the resulting bias of economic development structural change is an interpretation of the decline in labor income share in China.