China Center Chart Dive: China’s labor compensation share of GDP is on the rise; this should be good for consumption in the near-term

Since 2010, the decline in the Chinese savings ratio has been accompanied by an increase in labor compensation as a share GDP (i.e. wages), as opposed to the income from capital (which includes profits) as a share of GDP. Between 2010 and 2016, when the labor compensation share of GDP increased from 47.4 to 53.1 percent, the savings ratio decreased from 51.5 to 46.4 percent. This increase in the labor compensation share of GDP, which largely stems from businesses paying higher wages to a scarcer and more skilled labor force, is arguably one of the reasons for the increase in China’s consumption over recent years.

The sustainability of this trend—i.e. an increasing labor compensation share of GDP leading to decreased household savings, leading in turn to increased household consumption—depends on two factors: (1) the capital compensation share of GDP going down so that the labor compensation share can continue to rise and (2) the equality of the distribution of labor compensation.