Financing Constraints Of Private Firms And The Decline Of Labor’s Share In China

Based on the macro facts that labor’s share in national income is declining since 1995, the paper looked into the differences in financing environment of state-owned firms and private firms. We set up a theoretical model to analyze the effects of financing constraints on labor’s share, and used the Chinese industrial firms’database 1998-2007 for empirical research. After theoretical and empirical analysis, we revealed the following judgments:the financial system in China is dominated by state-owned commercial banks. They show serious credit discrimination and results in tighter financing constraints of private firms. Financing constraints affected private firms’ decisions on input; but the possibility of financing constraints of state-owned firms is rather small, so the phenomenon of decline in labor’s share caused by financing constraints in state-owned firms is not significant. With the continued improving proportion of private firms, serious financing constraints of private firms will eventually lead to the decline of overall labor’s share in China.Meanwhile, this paper made theoretical and empirical Analysis of transmission mechanisms of the financing constraints’ influence on labor’s share we thought that financing constraints affect the optimal portfolio decisions firms make by distorting capital prices. At current stage elasticity of factor substitution is less than 1, financial constraints result in decline in labor’s share through the optimal portfolio decisions made by firms. Also, the amounts of fixed asset affect a firm’s ability to get mortgage loans. When financing constraints exist, to invest an additional unit of fixed asset investment will enable firms to benefit from relaxation of financing constraints in the next issue; firms will tend to reduce labor input to smooth fixed asset investment. Financing constraints act as a "wedge" between marginal output of labor and real wages, and further lead to the decline in labor’s share. The empirical analysis show that the above two transmission mechanisms exist.