Globalization and the labor share in China: Firm‐level evidence

Abstract

Abstract This study examines the relationship between economic globalization (measured by exports and foreign direct investment) and the labor share in China's manufacturing sector. Using a large firm‐level panel dataset for 2001–2007, we find that the labor shares are significantly higher in exporting firms and foreign‐invested enterprises (FIEs), where the export status is more important than foreign ownership. The origins of the FDI and export types do matter. The aforementioned positive associations are primarily driven by ordinary exports and FIEs from Hong Kong, Macau, and Taiwan, whereas processing exports exhibit a negative association with the labor share. Our baseline results are about the between‐firm variations within industries. When controlling for firm fixed effects, the labor share remains to be higher for a firm becoming an exporter or increasing export intensity, while the labor share is lower when a firm get a foreign investor or increase their exports. Finally, total factor productivity and innovation are negatively correlated with the labor share, suggesting that technological progress may play a role in the decline of the labor share in China.

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