Shadow banking of non-financial firms and labor income share: An inverted U-shaped relationship

How shadow banking of non-financial firms, as a form of informal finance, affects labor income compensation and intra-firm income inequality is a significant issue faced by developing countries such as China. This paper empirically analyzes the impact of shadow banking of non-financial firms on labor income share and its heterogeneity, using annual data from non-financial listed companies in China's A-share market from 2007 to 2021. The empirical results indicate that when the level of shadow banking of non-financial firms is low, it has a significant positive effect on labor income share. However, at higher levels, there is an inverted U-shaped relationship between shadow banking of non-financial firms and labor income share. The heterogeneity analysis shows that when the level of shadow banking of non-financial firms is high, it increases the labor income share for executives but decreases it for ordinary employees, thus exacerbating income inequality within firms between executives and ordinary employees. Compared with the central, western, and northeastern regions, shadow banking of non-financial firms has a significantly positive impact on labor income share in the eastern region. The empirical results of this paper suggest that the growth in labor income share driven by the continuous expansion of shadow banking of non-financial firms is unsustainable in the long run. It is necessary to strengthen the regulation of financial institutions, promote the standardization and transparency of shadow banking development, and indirectly achieve the goal of increasing the proportion of labor compensation in the primary distribution of income. • By using the annual data of China's A-share non-financial listed companies from 2007 to 2021, this paper empirically analyzes the impact of corporate shadow banking on labor income share and its heterogeneity. • In the short term, the shadow banking of non-financial enterprises has a significant positive impact on the labor income share. However, in the long run, there is an inverted U-shaped relationship between the shadow banking of non-financial enterprises and the labor income share. • The empirical results of this paper show that the growth of labor income share under the continuous expansion of non-financial enterprise shadow banking is unsustainable in the long run, and it is necessary to strengthen the supervision of financial institutions and promote the standardization and transparency of shadow banking development, so as to indirectly achieve the goal of increasing the proportion of labor compensation in the primary distribution.