Analysis On The Demand Effect Of Labor Income Share Changes In China

In recent years, China’s share of labor income in initial distribution wasdeclined. Compared with other countries, decreasing degree in China is moresignificant. Because the changes in labor share have produced a series of socialand economic problems, the Party and the government has to increase the shareof labor compensation as an important aspect of improving people’s livelihood.At present domestic and foreign studies mainly focus on the influence factorswhich could lead to the changes in income share of labor, while few studiesdiscuss the changes in labor share affect economic growth. Therefore, it isimportant to consider changes in income share of labor on the impact ofaggregate demand.First of all, we make a descriptive analysis on the changes of labor incomeshare in this paper. In an overall view, our labor income share declined in recentyears. Although the proportion of labor compensation in the world declined, theperformance in china is more prominent. Research on different industries anddifferent areas, we found that the development on labor share in industries andcountries is not balanced.We adopts normative and empirical analysis method to analyze the incomeshare of labor impact on consumption, investment and net exports, and thenobtained the aggregate demand effects about changes in labor share. Based onestablishing the model of co-integration, error correction model and panel datamodel, we found that: First, China’s labor income share changes and consumerhave long term equilibrium relationship. In the long term, labor income sharerises1%, consumption increased by0.2926%. Labor income share ofconsumption has positive effects, but the investment and net export is notsignificantly affected. Second, in the short term, labor income share rises1%,consumption increased by0.3232%and net exports decreased by0.0153%, whilethe investment is not significantly affected. On the whole, the labor income sharehad a positive impact on aggregate demand. Third, after the financial crisis,China’s rising labor income share promotes consumption, but investment and netexports are not affected directly. As a whole, improving the labor income share isuseful to expand the aggregate demand, particularly domestic demand.Based on the view proposed, we concluded that improving the labor incomeshare in primary distribution is an effective way to stimulate consumption,enlarge aggregate demand and promote economic growth. Finally, this paperproposes suggestions to improve the labor income share in primary distribution,including: change government idea, reform the income distribution system; carryout the collective wage negotiations, optimize labor income distribution ratio;improve laborers’ quality and skill and so on.