Elasticity of Substitution, Technological Progress Bias and Labor Income Share: Evidence From China

Long-time low-level stagnation of labor income share (LIS) could lead to continuous deterioration of national income distribution status and increase the uncertainty of national development trend. A deep analysis into the root of long-time low-level stagnation of LIS is crucial to rectifying the structural disequilibrium of national income distribution and key to promoting sustainable economic growth. In view of this, this paper selects the province-level panel data of China during 2000 – 2017 for analysis. The research results show that elasticity of factor substitution (EFS) and technological progress bias (TPB) are key factors influencing LIS. With the rise of EFS, technological progress tends to be gradually biased towards capital factors and cause LIS to reduce. Meanwhile, the presence of TPB would in turn boost EFS, further causing LIS to reduce, forming a vicious circle, and leading the national economic structure to become even unbalanced. The above conclusion remains valid through the robustness test. Therefore, the government should design a series of reasonable institutions to promote the structural transformation of the national economy, rationalize the factor endowment during the production process, and make technological progress gradually biased towards labor factors, so as to improve the factor income distribution (FID) pattern.