Since the mid-1990s, China’s labour share — the proportion of national income paid to workers as wages — has steadily declined. This long-term fall, however, saw a turning point in 2008, when the share began to recover. Scholars have proposed many explanations for these shifts, often focusing either on broad macroeconomic factors or on firm-level microeconomic mechanisms. In light of this divide, a recent study published in China Economic Quarterly International has attempted to bridge the gap between these two perspectives. It does so by examining how firm-level changes and market dynamics together shape the aggregate labour income share in China’s manufacturing sector.

The study draws on two extensive data sources: the Annual Survey of Industrial Firms (1998–2007) and the National Tax Survey Database (2008–2016). Using these datasets, the researchers explore how individual firms’ labour shares and market positions contribute to overall trends in labour income distribution. They find that shifts in the aggregate labour share are not simply the result of uniform changes across firms. Instead, they arise primarily from how value added is reallocated among firms with differing labour shares, productivity levels, and ownership structures.

The first significant finding reveals that after 2008, aggregate labour share and average firm-level labour share moved in different directions. While labour shares declined across most firms, the main reason for the aggregate drop was that economic activity shifted toward firms with lower labour shares. As the corresponding author, Kang Zhou, explains, this indicates that structural changes within the economy — such as the growth of capital-intensive or high-profit firms that rely less on labour — play a key role in driving the national trend.

The second insight concerns the earlier period between 1998 and 2007, when the decline in aggregate labour share was not caused by dominant firms cutting their labour shares or low-labour-share firms expanding. Instead, it was due to a redistribution process in which many firms simultaneously reduced their own labour shares while expanding their market shares. This same pattern persisted after 2008, even though the overall labour share began to recover, suggesting that the underlying micro-level mechanisms linking firm behaviour and market structure remained consistent over time.

A third finding emphasises the pivotal role of state-owned enterprises (SOEs). Between 1998 and 2007, both SOEs and private firms displayed distinct trends in their labour shares. Still, quantitative analysis shows that SOEs alone accounted for over 80 per cent of the total change in the manufacturing sector’s aggregate labour share. This highlights how the state sector continues to influence income distribution and economic balance, even amid China’s broader transition toward a market-oriented economy.

The study concludes with reflections on policy implications and future research. The authors warn that a falling labour share can deepen inequality, weaken household consumption, and threaten long-term economic growth. They call for further research into other sectors, especially services, which now dominate China’s economy and employ nearly half of its workforce. As first author Junsen Zhang notes, examining labour share dynamics in the tertiary sector or across all industries would provide a more complete understanding of income distribution in modern China. Overall, the study enriches our understanding of how firm-level dynamics and structural transformations interact to shape national economic outcomes.

More information: Junsen Zhang et al, Changes in labor share of China: A micro-level anatomy, China Economic Quarterly International. DOI: 10.1016/j.ceqi.2025.05.002

Journal information: China Economic Quarterly International Provided by KeAi Communications Co., Ltd.