Exploiting or Augmenting Labor?
We examine whether the decline of the labor cost share in Chinese manufacturing industries is due to labor-augmenting technical change or rising wage markdowns. We show that existing “production approaches" do not separately identify wage markdowns from labor-augmenting productivity, and propose a solution to such a challenge by jointly estimating a labor supply curve with the production function. Applying our method to Chinese non-ferrous metal manufacturing and mining industries, we find that the decline in the labor cost share was mainly due to technical change rather than the change in labor market power. Wage markdowns slightly decreased over time, whereas a Hicksneutral model that fails to capture factor-biased technology change would lead to the opposite finding. Finally, labor-augmenting productivity grew rapidly and was partly driven by the privatization of state-owned enterprises.