Firm debt and labor share: The distribution effect of de-leverage

Abstract

China is now facing the challenges of high leverage. Our study has examined the role of firms’ rising debt in explaining the decrease in labor share in recent years. We developed a model to show that firms may strategically use debt to increase their bargaining power, resulting in lower labor share. Empirical evidence shows the labor share is robustly negatively related to debt per worker, and the negative correlation varies across ownership, labor union and maturity of debt. The findings imply that the de-leveraging policy may help alleviate the worsening income inequality.