The Aggregate Labor Share and Distortions in China

Xiaoyue Zhang and Junjie Xia

No 2136, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: This paper shows that in an economy where distortions prevent firms from using their profit-maximizing amounts of capital and labor, removing these distortions can generate both an efficiency gain and a higher aggregate labor share. We use firm-level data on Chinese manufacturing, mining, and public utilities in 2005 and estimate a general equilibrium model with heterogeneous productivity, technology, demand elasticities, and distortions across firms. We find that the distortions cause most firms to be too small. Removing them raises the aggregate demand for labor and, holding the aggregate labor and capital fixed, increases the wage by 57%. Consequently, the aggregate labor share rises by 24 percentage points. Aggregate productivity quadruples.

Keywords: Distortions; aggregate labor share; latent market structure; firm heterogeneity (search for similar items in EconPapers)
JEL-codes: C4 D3 E1 L6 O1 O5 (search for similar items in EconPapers)
Pages: 42 p.
Date: 2025
New Economics Papers: this item is included in nep-cna and nep-lma
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.diw.de/documents/publikationen/73/diw_01.c.972444.de/dp2136.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:diw:diwwpp:dp2136

Access Statistics for this paper

More papers in Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Bibliothek ().