Government Fiscal And Labor Income Share: An Empirical Study Of China Under The Framework Of Endogenous Growth Theory

Since the mid-1990s of China, labor income share has been a significant decline:from54%in1996to44.9%in2011, it has fallen nearly10percentage points. Althoughrecent data show that the labor income share is rebounding slowly, however, fromhorizontal contrast with developed market economies, the fact that labor income share ofChina was at a low level is no doubt. Most scholars believe that low labor income sharehas run a great risk to the national economy. First of all, relative to the declining share oflabor income, the share of capital income will be overmuch for an economy. In this case,a bad result will arise: inequitable distribution, and polarization. Secondly, according tothe law of diminishing marginal propensity to consume, the low labor income share willcause an inverted T-income distribution pattern, so that the main people of the economywho have more marginal propensity to consume will lose their spending power: Sadly,domestic demand will be suppressed either. Finally, for China, who is seeking an changeof her development mode, the low labor will be a huge obstacle on the way.In China, the government committed to improve the low labor income share, with itsgreat economic power. In this context, this paper focuses on the intrinsic relationshipbetween government fiscal activities and labor income share. On the basis of the literaturestudy and theoretical analysis, the author suggests that the government fiscal activitiesshould influence the economic growth and distribution through a series of endogenouselements under the framework of endogenous growth theory. The significant of thismechanism can be summarized as linear production technology, spillovers, productivepublic capital, human capital accumulation, R&D investment etc. On the basis of aboveall, the paper builds the capital-labor-government three departments endogenous growthmodel, which shows that the government fiscal activities will improve the marginalproduct of labor by providing public services so that the labor’s income rises either; in thepremise of pursuing an optimal economic growth of the economy, government financescan affect labor and capital income share by changing the level of taxes and capital-outputelasticity.Furthermore, this paper also gives an empirical analysis of the impact of governmentfiscal activities on the labor income share based on the2004-2011Chinese provincialpanel data. With the system GMM method, the regression results show that: betweenfiscal expenditures and labor income share, there significantly exists an inverted "U"-shaped relationship, and in the observation period they have a significant positivecorrelation, when we introduction time dummy variables to our research the effects offiscal policies significant exist; fiscal revenue has negative impact on the labor incomeshare. When we comparing the differences of the influences on labor income share fromthe government fiscal activities between eastern provinces and, we see that theexpenditure of eastern provinces has more positive effect on labor income share thancentral-western provinces, and the negative effect from eastern provinces’ financialrevenue is not significant. In addition, the share of tertiary industry, capital accumulationand labor protection play positive roles on labor income share; on the contrary, humancapital and foreign trade produce negative effects.