China’s Factor Price Distortion and Imbalance in Aggregate Demand Structure Impact Economic Stability and Growth

Sigao Lv, Yanwu Wang and Yuanfeng Gao

Global Economic Review, 2025, vol. 54, issue 1, 21-48

Abstract: This study examines capital and labour price distortions in China using a dynamic general equilibrium model with tax wedges. Both factors exhibit significant negative distortions, with labour distortion more severe and rising over time. These distortions lower the consumption-to-investment ratio, leading to aggregate demand imbalance, especially due to labour price distortion. Robustness tests confirm that correcting distortions improves demand structure. Welfare analysis shows labour distortion can reduce welfare by over 14.5% and 27.6% in different models. Policy reforms addressing these distortions can promote consumption, curb excessive investment, and enhance economic stability and social welfare.

Date: 2025
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DOI: 10.1080/1226508X.2025.2487976

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