Firm leverage and labour share: evidence from China

Abstract

We examine the relationship between firm leverage and firm-level labour shares by using the panel threshold effect model. Based on the sample of Chinese firms listed in the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE) from 2010 to 2019, we find that leverage has a significant threshold effect on the labour share of firms, and on average, firm leverage is positively associated with the labour share when the debt per labour is less than 640,000 CNY (approximate 89,600 USD). When the firm leverage exceeds the threshold, firm leverage is negatively associated with labour share. We also find significant heterogeneity over state-owned enterprises (SOEs) and non-state-owned enterprises (non-SOEs), capital-intensive firms and labour-intensive firms, firms with different levels of financial constraints and firms in different life cycles. We contribute to prior literature by revealing the nonlinear association between leverage and firm-level labour share. Therefore, various policies (e.g. made credit policy to restrict lending to firms without sustainable profitability) must be implemented to increase the labour share of enterprises as well as achieve the higher-quality development of the economy in the long term.

Keywords:

• Leverage
• income distribution
• labour share
• threshold effect

JEL CODES:

• D12
• E21
• G10

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Serval studies on macroeconomics (e.g., national-level research) also used the term “labour income share” in study this issue.

2 We excluded the firm samples with negative operating surplus (i.e., labour share is more than 1). In prior works, labour share should be among 0 and 1. According to the calculation formula of labour income share, labour share = employees’ total compensation / (employees’ total compensation + operating surplus + depreciation of fixed assets + net production tax). However, if the labour share is above 1 (e.g., due to negative operating surplus), it means that the sample data is abnormal, so it should be deleted. Moreover, we also run robustness test while including firms which labour share is above 1, and results are still robust.

Additional information

Funding

We acknowledge financial support from the major project of National Social Science Foundation of China (21&ZD096) and the postgraduate research project of School of Business Administration, Dongbei University of Finance and Economics (GSY2021006).