Innovation and knowledge as drivers of the ‘great decoupling’ in China: Using long memory methods.

Abstract

We observe a growing empirical literature on the divergence between labor productivity and compen-sation on a global scale. Empirical evidence of the decoupling for the OECD and transitional economiessupport the hypothesis of divergence between productivity and pay after 1980s. In this paper, we offerevidence of the decoupling in China from 1952 to 2018. We use state-of-the art, robust econometric tech-niques based on long memory to identify the main determinants of persistence and divergence. From 1952to 2018, we measure the decoupling average annual growth rate of 0.93% (using per hour worked data).Productivity-compensation per worker divergence follows the average annual growth rate of 1.52%. Weprovide evidence that the decoupling in China is caused by innovation-based shifts, globalization, a shiftto knowledge growth management, ‘supercycles and boom-bust,’ ‘superstars,’ declining labor share andincreasing wage inequality. Knowledge and innovation based technological advancement accounts forthe labor productivity and compensation divergence in China. The results show a diverging trend betweenlabor productivity and labor compensation caused by innovation and knowledge growth model. Studyresults offer robust proofs for the decoupling with a long memory pattern in China with innovation andknowledge leading to an increasing inequality in the long run. Policy makers and practitioners shouldaddress the issue promptly if do not want to face various growth headwinds in the future.