The Mechanism Of Labor’s Income Share In A Dual Economy

The on-going decline of labor’s income share, from59.27%in1998to51.66%in2010, has been an important phenomenon of China’macro-economy, and become a hotspot not only for public debate but also for academic research. As a developing country, the economic structure of China has the apparent duality. Therefore, to explain the decline of the share of labor income in China, it has an important significance to investigate the mechanism of labor’s share in a dual economy. Based on above, the questions to answer in this article is a) which factors are the determinants of labor’s share in a dual economic structure? b)How these factors affect the movement of the labor’s share? c) What about the case of China?By using a static model, we can find that the labor share of income is determined by technology, capital, land and the migration of labor. The heterogeneity of firms can also affect the labor’s share. Concretely, a lager elasticity of technology leads to a increase of labor’s share; and the effects of capital and land on the labor income share is determined by their price elasticity, via the factor with a large price elasticity getting higher income. Though the effects of labor migrate on labor’s share are complex, the elasticity of labor mobility plays a pivotal role. If the production function is Cobb-Douglas function, inelasticity of labor migrate means a decline of labor’s share, vice versa. Besides, the labor income share declining with the firm heterogeneity weakened.With an empirical Analysis on the labor’s share of China by using the panel data of provinces, it is found that the technology of agricultural sector is labor-biased and the technology of non-agricultural sector is capital-biased. Due to a low price elasticity, capital has an positive influence on the labor’s share, while the increase of land eroding the labor’s share. And with the migration of labor from agricultural sector to non-agricultural sector, the labor’s share declining. The firm heterogeneity also has a negative effect on the labor’s share.