Much Ado about Nothing, Almost: Factor Income Distribution in China - PowerPoint PPT Presentation

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Much Ado about Nothing, Almost: Factor Income Distribution in China

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Much Ado about Nothing, Almost: Factor Income Distribution in China. Chong-En Bai. Zhenjie Qian ... Capital share increased from 37.34 in 1978 to 45.23 in year 2006. ... – PowerPoint PPT presentation

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Title: Much Ado about Nothing, Almost: Factor Income Distribution in China


1
Much Ado about Nothing, Almost Factor Income
Distribution in China
  • Chong-En Bai
  • Zhenjie Qian
  • Tsinghua University

2
Trend since 1978
3
Observations
  • Capital share increased from 37.34 in 1978 to
    45.23 in year 2006.
  • Labor share declined from 49.8 in 1978 to 40.61
    in 2006.
  • Share of taxes on production increased from 12.85
    in 1978 to 14.16 in 2006.
  • There is an abrupt change between 2003-2004
    capital share increased from 39.93 to 44.35, and
    labor share declined from 46.16 to 41.55.

4
Trend since 1978 (net of production taxes)
5
Questions
  • What is behind the recent changes in factor
    income distribution in China?
  • What explains the abrupt changes between 2003 and
    2004?

6
Why Do We Care?
  • Factor income distribution may affect size income
    distribution.
  • What Is China Doing to Its Workers? (by Arvind
    Subramanian, Peterson Institute, in Business
    Standard, New Delhi, February 8, 2008)
  • This might well be the mother of all
    redistributions.
  • Is the dramatic decline in labor's share of the
    economic pie ominous?
  • Will the decline in labor's share of the economic
    pie be reversed through political change? That
    may be China's big question.

7
Why Do We Care?
  • Factor income distribution may affect size income
    distribution.
  • A workers' manifesto for China (Economics focus,
    Economist, Oct 11th 2007) Many countries have
    seen a fall in the share of labour income in
    recent years, but nowhere has the drop been as
    huge as in China. This partly reflects China's
    large pool of surplus labour, which has depressed
    wages relative to the economy's large
    productivity gains.

8
Why Do We Care?
  • Factor income distribution may affect size income
    distribution.
  • Many economists in China have also talked about
    the rapid decline in labor share and proposed
    policies in response to the decline.
  • The government has adopted or is considering
    adopting policies to deal with the issue.

9
Why Do We Care?
  • Return to capital
  • Investment rate has been increasing. (figure)
  • Capital output ratio has also been increasing.
    (figure)
  • How has the rate of return to capital changed?
    The answer depends on capital share.
  • Kaldors stylized facts about the growth of
    advanced industrial economy
  • Fact one Real output per capita grows at more or
    less constant rate over fairly long periods of
    time
  • Fact two The stock of real capital, crudely
    measured, grows at a more or less constant rate
    exceeding the rate of growth of labor input
  • Fact three The rates of growth of real output
    and the stock of capital goods tends to be about
    the same, so that the ratio of capital to output
    shows no systematic trend
  • Fact four The rate of profit on capital has a
    horizontal trend
  • Fact three and four imply that factor income
    share in output should be constant

10
Preview of Results
N1 Aggregate Labor share start to decline in 1995
11
Preview of Results
  • The elasticity of substitution between capital
    and labor in industry sector is not significantly
    different than 1.
  • The change in the relative price of capital and
    labor is not a significant factor behind the
    change in labor share in industry sector.

12
Outline
  • What Explains the Abrupt Changes between 2003 and
    2004?
  • Structural Transformation
  • Change of Labor Share in Industry

13
What Explains the Abrupt Changes between 2003
and 2004?
  • Before 2004, all the income of the self-employed
    was counted as labor income.
  • Since 2004, income of the owners of the
    individual businesses, a major form of
    self-employment other than rural households, has
    been ascribed as capital income.
  • In 2004 census, its stipulated that the
    operating surplus of state-owned and
    collective-owned farms should be counted as labor
    compensation and almost half of the provinces
    follow this method in year 2004, which explains
    why there is an abrupt increase in the labor
    share in primary industry.

14
What Explains the Abrupt Changes between 2003
and 2004?
  • Adjustments made using the 2004 census data
  • In table 1-26 of China Economic Census Yearbook
    (NBS, 2007), there are items such as operating
    revenue, operating expenditure including employee
    compensation and payable taxes, book value of
    fixed assets for individual businesses by
    industry, which can be employed to calculate
    value-added, operating surplus for individual
    businesses by industry according to the method
    given in DNA (2007).
  • Depreciation book value of fixed assets 5
  • Operating surplus operating revenue-operating
    expenditure-depreciation
  • Net production taxes and labor compensation
    reported in NBS (2007)
  • Value added Depreciation Operating surplus
    Net production taxes Employee compensation
  • We subtract calculated operating surplus of
    individual businesses from the reported total
    operating surplus by industry and add it to
    employee compensation. With this adjustment, we
    recalculate labor share.

15
What Explains the Abrupt Changes between 2003
and 2004?
  • We also adjust for the inconsistency between
    national and provincial data on individual
    businesses, by assuming that labor productivity
    of individual businesses at the provincial level
    is the same as that at the national level.
  • As we do not have enough information to judge how
    much operating surplus of state-owned and
    collective-owned farms are counted as labor
    compensation in 2004, we could not make
    adjustment to eliminate the effect of the
    associated change. We recalculate aggregate labor
    share in 2004 using the actual labor share in
    primary industry in year 2003.

16
What Explains the Abrupt Changes between 2003
and 2004?
  • Adjustments results

Notes N1 labor share calculated using reported
data N2 labor share adjusted using Census data
N3 labor share adjusted using Census data and
provincial employment numbers in individual
businesses N4 labor share in primary industry
in year 2004 is replaced by that in year 2003
  • Conclusion
  • The jump in reported labor share between 2003 and
    2004 is the result of the change in the way we
    tally the income of the self-employed.

17
Structural Transformation
  • Observation
  • Labor share of the primary sector is much higher
    than other industries.
  • Labor share of the primary sector is
    overestimated since all the income of rural
    households engaged in primary industry production
    is counted as labor income

18
Structural Transformation
  • Observation
  • The structural transformation resulted in the
    decline of the primary sector and rise of the
    tertiary sector.
  • As labor share in the primary industry is much
    higher than that of the tertiary industry, labor
    share declined with the structural
    transformation.
  • As labor share in the primary industry is
    overestimated, the effect of structural
    transformation would not have been as large if we
    obtain true estimate of labor share in primary
    industry

19
Structural Transformation
  • If theres no structural transformation between
    1995 and 2004, then the labor share in 2004 would
    have been 57, rather than 53.6
  • Structural transformation can explain 31
    percentage points in the change of labor share.

20
Change in Industry
  • Change in labor share in industry explains 15
    percentage points in the change in aggregate
    labor share.
  • What has happened?

21
Change in Industry Theory
  • Utility function
  • Production function
  • Firm objective SOEs are interested in the size
    (output and/or employment) of the firm as well as
    profits.
  • labor share formula for labor share
  • The elasticity of substitution between capital
    and labor is important.

22
Change in Industry Predictions
  • Ownership effect labor share is higher when the
    firm has a stronger size preference.
  • Monopoly power labor share is lower when the
    firm has stronger monopoly power
  • The change in the relative price between capital
    and labor is reflected in capital-output ratio in
    efficient term.
  • Elasticity of substitution between factors
    determines the relationship between labor share
    and capital-output ratio

23
Change in Industry Data
  • Description of the data
  • Annual survey of industrial firms conducted by
    the National Bureau of Statistics of China from
    1998 to 2005. Industrial survey covers all SOEs
    and non state-owned enterprises with annual sales
    over 5 million Yuan.
  • Capital share ratio of operating profit and
    accounting depreciation to value added at factor
    cost
  • Three proxies for monopoly power price markup
    HHI CR10
  • Two groups of proxies for ownership equity
    shares (req_x) control rights (D_x)
  • Capital-output ratio ratio of fixed assets at
    book value to value added at factor cost
  • Capital augmenting technical parameter
    controlled by year dummies
  • Other factors are controlled by industry dummies

24
Change in Industry Methodology
  • Description of the methodology
  • System GMM estimation estimates level and
    difference equations simultaneously, each using
    lags of difference term and level term of
    endogenous variables as GMM instruments. This
    deals with the problem of the endogeneity of
    capital-output ratio.
  • System GMM estimation estimate level equation so
    that explicit fixed effect such as region dummies
    and industry dummies can be estimated.
  • System GMM estimation uses both between group and
    within group information when estimating level
    and difference equation and hence obtain precise
    estimation for the difference of capital share
    between enterprises with different ownership
    structure.

25
Change in Industry Empirical Results
Notes N1, base model N2, log model legend
plt.1 plt.05 plt.01
26
Change in Industry Robust Checks
legend plt.1 plt.05 plt.01
27
Change in Industry Robust Checks
Notes N1, observations in sample no less than 3
years N2 observations in sample since 1998
legend plt.1 plt.05 plt.01
28
Change in Industry Decomposition
-81 of actual increase in capital share can be
predicted by the model -1/2 of the predicted
capital increase is contributed by ownership
restructure -1/4 of the predicted capital
increase is contributed by monopoly power
change -contribution of the restructure across
region and industries is trivial
29
International Comparison
  • The potential problems with international
    comparison
  • Data compatibility the tally of income of the
    self-employed differs across countries
  • Gollin (2002) estimated labor share by country
    assuming income of self-employment as capital
    income, comparable to that adopted by the NBS

30
Rate of Return to Capital Revised
31
Preview of Results
N1 Aggregate Labor share start to decline in 1995
32
Conclusion
  • The elasticity of substitution between capital
    and labor is not significantly different than 1.
  • The change in the relative price of capital and
    labor is not a significant factor behind the
    change in labor share.

33
Investment rate since 1978
Back
34
Capital-output ratio since 1978
Back
35
Structural Transformation
Back
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