Are Capital And Labor Inputs Properly Measured In China?

We first follow the standard approaches (OECD, 2001) to measure capital and labor services in China during the time period of 1980-2016 using the China Industrial Productivity database, and then investigate the influences of replacing factors services with their stocks, which is often adopted in current studies, on total factor productivity (TFP) growth. We also investigate the resource reallocations and their impacts on TFP growth, and further trace their industry origins. The results show that by taking quality changes into account, the annual growth rates of capital service and labor service are 12.30% and 3.56%, respectively. The economy-wide capital quality declines by 3.68% while labor quality increases by 34.10%. Consequently, the aggregate TFP growth of China is underestimated by 6.58% when only replacing capital service with capital stock, while it is overestimated by 50% when only replacing labor service with labor stock and is overestimated by 43.42% when replacing both capital and labor services with their stocks. There are barriers to factor mobility that cause resources misallocation in China, which could be corrected by following market mechanisms. The net reallocation of capital and labor contributes 60.53% to the aggregate TFP growth. Industries with high (or low) factor input growth and high (or low) factor service price contribute to the improvement of factor allocation while those with high (or low) factor input growth and low (or high) factor service price are responsible for the negative reallocation of factor inputs.