Sources of Chinese labor productivity growth: A structural decomposition analysis, 1987-2005

We decompose labor productivity growth from 1987 to 2005 by examining six partial factors (both supply and demand): changes in value-added coefficients, labor inputs, shares of sectoral demands that are fulfilled domestically, input mix, and the intra-sectoral shares and intersectoral mix of final demand. Our analysis confirms that simply by virtue of its size and extremely low level of labor productivity, China's farm sector continues to weigh heavily in China's overall economic advances. Labor savings have levied the largest influence on the labor productivity on all sectors across all three study subperiods. We find that this transition is highly correlated with capital deepening that accompanies China's opening up process. Still, changes in the intra-sectoral shares and the intersectoral mix of China's final demand also have become quite strong, especially in recent periods. Due to ever-increasing competitive pressures as China continues to open, changes in industries value-added coefficients have tended to counteract some of the positive benefits of labor savings for most sectors. The effects on changes in labor productivity of technology change and changes in the use of imports have been comparatively negligible and any variation in their sectoral effects have been waning over time.