Effects of Labor Allocation Distortion

Bai Peiwen

School of Economics, Xiamen University, Xiamen, China


Abstract: This paper aims to investigate the effects of labor allocation distortions and various levels of distortion-free labor allocation on social output in China’s primary, secondary and tertiary industries. Theoretical model creation and empirical study have led us to the following findings: the quantity of workforce in China’s primary industry exceeds the quantity of workforce under the scenario of distortion-free labor allocation and the same is generally true for China’s tertiary industry. However, the quantity of labor allocation in secondary industry is significantly below the level of distortion-free allocation but the share of allocation distortion overall tends to decline. Labor allocation distortions for various sectors are mainly caused by intra-sectoral allocation distortions and sectoral wage differences, of which the effect of internal distortion factor is the most obvious. In terms of total output, the eliminations of total distortion, wage difference distortion and internal allocation distortion will all cause total social output to exceed original output, and labor reallocation accompanying capital change will not only bring about a further increase of output but may offset the defects of limited potentials of labor resources reallocation. Growth rates with the eliminations of wage difference distortion, internal allocation distortion and superimposed factor can basically explain for the growth rates with the elimination of all distortions. Given this background, it is necessary to take effective measures at an early date to reduce China’s labor allocation distortions and improve overall economic efficiency .

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