How does labour share respond to risk? Theory and evidence from the Chinese industrial sector

Jingxian Zou, Guangjun Shen and Shen Jia

International Labour Review, 2020, vol. 159, issue 2, 259-281

Abstract: This study discusses the role of firm risk in the declining labour share in China. Based on the model developed by Holmström and Milgrom (1987), the authors demonstrate that lower firm risk can motivate workers to work harder, leading to higher output per worker and average wage. However, increased output will lower the labour share. Using data from the Chinese Industrial Enterprises Database for the period 1998–2007 and the World Bank's Investment Climate Survey 2005, empirical evidence supports this hypothesis and performs robustly across various model specifications and proxies for firm risk, indicating a positive correlation between labour share and firm risk.

Date: 2020
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