Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/325311 
Year of Publication: 
2025
Series/Report no.: 
DIW Discussion Papers No. 2136
Publisher: 
Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
Abstract: 
This paper shows that in an economy where distortions prevent firms from using their profit-maximizing amounts of capital and labor, removing these distortions can generate both an efficiency gain and a higher aggregate labor share. We use firm-level data on Chinese manufacturing, mining, and public utilities in 2005 and estimate a general equilibrium model with heterogeneous productivity, technology, demand elasticities, and distortions across firms. We find that the distortions cause most firms to be too small. Removing them raises the aggregate demand for labor and, holding the aggregate labor and capital fixed, increases the wage by 57%. Consequently, the aggregate labor share rises by 24 percentage points. Aggregate productivity quadruples.
Subjects: 
Distortions
aggregate labor share
latent market structure
firm hetero-geneity
JEL: 
C4
D3
E1
L6
O1
O5
Document Type: 
Working Paper

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