Investment incentives and labor share: evidence from accelerated depreciation policy in China

Lexin Zhao, Qianbin Feng and Wen-Quan Hu

Applied Economics, 2022, vol. 54, issue 41, 4751-4766

Abstract: This paper studies the impact of Chinaʻs accelerated depreciation policy (ADP) that was enacted in 2014 on labor share. We explore a firm-level dataset from Chinaʻs industrial enterprise database and estimate the policy effects using a difference-in-differences framework. We find that the ADP apparently reduces the labor share of the treated firms compared to the control firms, which is a net effect jointly driven by the capital deepening and skill structure upgrading channels. Among these two channels, the former is dominant and has negative effects on labor share, while the latter is positively related to the labor share. We also demonstrate that the firms with less financial constraints experience a more profound capital deepening process and a larger decline in labor share after policy enactment. These results suggest that the widespread use of investment tax incentives may be one of the reasons for the decline in global labor share in recent years.

Date: 2022
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DOI: 10.1080/00036846.2022.2036320

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