Shadow banking of non-financial firms and labor income share: An inverted U-shaped relationship

Huaming Zhong, Zinb Abduljabbar Mohamed Al-Duais and Yaoting Guo

International Review of Economics & Finance, 2025, vol. 100, issue C

Abstract: How shadow banking of non-financial firms, as a form of informal finance, affects labor income compensation and intra-firm income inequality is a significant issue faced by developing countries such as China. This paper empirically analyzes the impact of shadow banking of non-financial firms on labor income share and its heterogeneity, using annual data from non-financial listed companies in China's A-share market from 2007 to 2021. The empirical results indicate that when the level of shadow banking of non-financial firms is low, it has a significant positive effect on labor income share. However, at higher levels, there is an inverted U-shaped relationship between shadow banking of non-financial firms and labor income share. The heterogeneity analysis shows that when the level of shadow banking of non-financial firms is high, it increases the labor income share for executives but decreases it for ordinary employees, thus exacerbating income inequality within firms between executives and ordinary employees. Compared with the central, western, and northeastern regions, shadow banking of non-financial firms has a significantly positive impact on labor income share in the eastern region. The empirical results of this paper suggest that the growth in labor income share driven by the continuous expansion of shadow banking of non-financial firms is unsustainable in the long run. It is necessary to strengthen the regulation of financial institutions, promote the standardization and transparency of shadow banking development, and indirectly achieve the goal of increasing the proportion of labor compensation in the primary distribution of income.

Keywords: Shadow banking of non-financial firms; Labor income share; Internal income inequality; Informal finance; Financial development; The inverted U-Shaped relationship (search for similar items in EconPapers)
JEL-codes: E22 G21 G31 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:100:y:2025:i:c:s1059056025002795

DOI: 10.1016/j.iref.2025.104116

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