Market Distortions and Labor Share Distributions: Evidence from Chinese Manufacturing Firms
No 6466, Working Paper from Department of Economics, University of Pittsburgh
n China's manufacturing sector, labor shares varied widely across firms, and the mass offirms paying low labor shares increased during 1998-2007. To explain this pattern, we build amodel that connects labor shares with capital-labor ratios and product markups and examinehow firms' responses to market distortions shape labor share distributions. The widely disperseddistributions of capital-labor ratios and markups, combined with estimated high elasticities ofcapital-labor substitution, account for the first three moments of labor share distributions. Thesimultaneous divergence of capital-labor ratios and convergence of markups explains the leftwardshift in labor share distributions over the period.
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