Trade liberalisation and labour shares in China

• Author: Fariha Kamal,Devashish Mitra,Mary E. Lovely
• Published date: 01 December 2019
• Date: 01 December 2019
• DOI: http://doi.org/10.1111/twec.12857

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wileyonlinelibrary.com/journal/twec World Econ. 2019;42:3588–3618.

© 2019 John Wiley & Sons Ltd

Received: 4 June 2018

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Revised: 14 June 2019

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Accepted: 28 June 2019

DOI: 10.1111/twec.12857

ORIGINAL ARTICLE

Trade liberalisation and labour shares in China

FarihaKamal1

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Mary E.Lovely2

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DevashishMitra2

1Center for Economic Studies,U.S. Census Bureau, Washington, District of Columbia

2Department of Economics,Syracuse University, Syracuse, New York

KEYWORDS

China, labour shares, trade liberalisation

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INTRODUCTION

China's economic reforms and rapid development have produced spectacular growth in both real in-

comes and income inequality. While real incomes grew by more than 10% per annum between 1998

and 2007, one measure of the distribution of income, labour's share of national income, fell from 50%

to only 40%.1 Given the increasing importance of international trade and investment to China's devel-

opment, it is natural to put the blame for the declining labour share on the liberalisation of commercial

policy. The most prominent change during this period is China's accession to the World Trade

Organization (WTO) in 2001. In this paper, we investigate the relationship between the associated

tariff cuts and changes in labour shares at the firm level.

We study changes in labour shares rather than changes in absolute real wages motivated by the observa-

tion that since the 1980s many countries have experienced declines in labour shares, but not all have expe-

rienced declines in real wages.2Indeed, over the period 1998–2007, real annual urban wages in China grew

by 13.2% (Yang, Chen, & Monarch, 2010). Bentolila and Saint‐Paul (2003) describe a similar outcome of

declining labour shares but real wage growth for France during the period 1970–90. Labour's share of in-

come is of interest in its own right because a decline in labour share is associated with an increase in overall

inequality. Further, changes in labour's share of income provide information on the extent to which workers

benefit from higher productivity and are, thus, associated with social justice and fairness.

Using a 10‐year panel of Chinese manufacturing firms, we ask whether firms in industries with

relatively deep tariff cuts experienced smaller or larger declines in labour shares relative to firms in

other industries. We allow the effect of tariff cuts in a firm's own industry to differ from that of tariff

1 Income growth rate from World Bank, Economic Indicators; labour shares from Qian and Zhu (2012). Knight and Ding

(2012) discuss Chinese GDP statistics and revisions by Western scholars. Bai and Qian (2010) calculate a drop of 12.5

percentage points in China's labour share of national income using official data for 1995–2007, but after adjusting for changes

in accounting methods, they estimate a drop of 7.2 percentage points.

2 A recent International Labor Organization report (ILO, 2013) confirms that since the 1980s a majority of countries have

experienced falling labour shares and finds that this has happened most frequently where wages have stagnated but also in

some countries, such as China, where real wages have grown strongly.

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cuts in industries that provide intermediate inputs. Given China's enormous size, we also ask whether

or not our estimated tariff effects attenuate with distance from China's eastern international ports.

Additionally, we explore the heterogeneous effects of tariff cuts on firms that host a union and for

private and foreign firms versus state firms.

We are interested not only in measuring the effect of output and input tariff on labour shares but

also in the channels by which such impacts occur. After discussing theoretically the channels of influ-

ence, we empirically measure the extent to which tariff cuts work through changes in industry rents as

opposed to factor input choices. To conduct this exploration, we adopt the markup estimation method

pioneered in De Loecker Goldberg Khandelwal and Pavcnik (2012) in their study of markups of Indian

enterprises. We demonstrate that this methodology is also useful in understanding the behaviour of la-

bour shares, specifically the extent to which they are influenced by movements in firm‐level markups.

Reforms surrounding China's 2001 WTO accession produced significant liberalisation despite the

fact that China was already integrated into global production networks.3 Protection remained strong in

industries for which domestic supply was deemed ‘sufficient’, state enterprises were dominant, or in-

dustrial policy or national security supported domestic expansion. Through its accession agreements,

China committed to the reduction of both tariff and non‐tariff barriers to impor ts of industrial goods,

including those in many of the most protected industries. Tariff reductions were phased over a period

of 10years, but the bulk took place immediately on 1 January, 2002. The average import‐weighted

output tariff rate on manufactured goods was lowered from about 20% in 1998 to about 9% by 2007,

while the import‐weighted average input tariff went down from about 15% to about 7%.4

Using China's Annual Survey of Industrial Production, we find a positive and statistically significant

effect of these output and input tariff cuts on labour shares of output value. We also find a positive and

significant effect of reductions in the effective rate of protection on labour shares of value added. Our

estimates suggest that, on average, an industry that experienced no reductions in output or input tariffs

would have a 15.7% lower labour share of value in 2007 than it actually did, assuming the same econ-

omy‐wide trends. Thus, our findings are consistent with the view that workers share part of the produc-

tivity gains from China's WTO accession identified by Brandt, Biesebroeck, Wang, and Zhang (2017).

To enhance identification, we allow the effect of both input and output tariff reductions to vary by

firm location and we find that the positive impact of tariff reductions on labour share is stronger where

access to global markets is better. Regression results indicate that while lower output and input tariffs

lead to a higher labour share, the magnitude of the input tariff effect is smaller when a union is present

in the enterprise. Interestingly, we find a significant and positive relationship between firm markups

and labour shares in only those domestic private firms in which a union is present, suggesting that a

collective voice for workers does influence the degree of rent sharing within the fir m. In contrast, for-

eign‐invested enterprises with a union present exhibit no significantly different rent‐sharing behaviour

than do those without a union present, with rent sharing taking place in both cases. Lastly, we test the

hypothesis that changes in labour share are stronger for non‐state firms than for state firms, and find

no statistically significant difference between state firms and domestic private firms in the degree to

which trade liberalisation raises labour shares, but we do find a significantly larger response among

foreign‐invested enterprises to both input and output tariff cuts. Our results, overall, are very robust to

introducing controls for city‐level minimum wage and firm‐level total factor productivity (TFP), both

of which turn out to be negatively associated with labour shares.

3 As Branstetter and Lardy (2008) stress, China's drive to liberalise dramatically accelerated in the late 1990s. China

unilaterally reduced tariffs on imports, dramatically cut quantitative restrictions on imports, eliminated many restrictions on

foreign investment and expanded public investment in roads, ports, airports and communications.

4 Average effective applied tariff rate calculated by authors from data source shown in Table 1 below.