Sectoral wage share and its decomposition in China

This paper investigates sectoral contributions to the trend of national wage share, or the labor income share, during 2000-2014 in China. I apply the logarithmic mean Divisia index (LMDI) decomposition, the method widely used in energy studies, to decompose the trend of the wage share. At a sectoral level, with rapid structural transformation, structural change negatively impacted the wage share through the between-sector effect - the structural and price effects - mainly from agriculture. This result confirms Arthur Lewis's hypothesis that structural transformation has a negative contribution to the wage share. At a national level, when the wage share declined before 2008, the between-sector effect was as significant as the within-sector effect - the wage and productivity effects. After 2008, the within-sector effect directed the increasing wage share trend. This implies that although structural transformation matters to the wage share in a large developing country like China, a wage-productivity nexus has been more influential and determined the increasing trend of the wage share since 2008.