The share of retained earnings is assumed to fall, and dividend payouts to rise to reflect the diminishing role of state enterprises in the economy. The dividend rate, i.e. the share not used for retained earnings, was 38.9% in 2010 and we project it to rise to 58% by 2020. It should be pointed out that national savings and investment in the Chinese data includes capital such as roads and other public infrastructure, items that are excluded from the “gross fixed private investment” item in most other countries National Accounts.

In the labor supply expression eqn. (A47) we have the product of the working-age population, annual average hours and quality. In Cao and Ho (2014) we discussed various population growth scenarios including the different two-child policies. Projections by age groups are taken from projections made by the Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat<sup>23</sup> and in the central population scenario we adjust them to incorporate a looser child policy. The results are plotted in Figure A5.

The composition of the work force changes over time with a bigger portion of educated workers, bigger or smaller portion of more experienced workers, and an older average age. This quality of labor _L_ input index,<sup>_q_</sup> _t_<sup>, in estimated in Cao et al. (2009) to have grown at 0.9% per year for the period 1983-2000.</sup> Given the expectation of continued higher educational attainment in the future we assume that China's aggregate labor quality continue to rise, but at a diminishing rate. By 2040 the quality index is assumed to grow at only 0.2% per year. For comparison, the U.S. labor quality growth peaked at 0.5% during the 1960s, and fell to 0.3% per year during 1995-2000 (Jorgenson, Ho and Stiroh, 2005, Table 6.5).

Total labor hours depend also on the participation rate and annual working hours. There is no comprehensive data on the number of hours worked and based on comparisons to other countries we project it to rise due to improvements in the functioning of the labor market -- lower underemployment, seasonal unemployment and other labor market frictions. We assume that hours worked per capita rises at 0.2% per year initially but slowing down over time. The results are plotted in Figure A6.

_I_ We allow for improvements in future capital “quality,” or composition, as represented by the  _t_ coefficient in (A73). Cao et al. (2009) note how the composition of the capital stock in China has shifted towards assets with shorter life, i.e. towards a smaller share of structures and a larger share of equipment such as computers. They explain how assets which have shorter useful lives generate higher annual capital services per dollar of capital stock, and hence is of a higher quality in the terminology of Jorgenson, Ho and Stiroh (2005). While the ratio of equipment to structures has moved in different directions over the past 30 years, we believe it will return to a more typical development trend of rising equipment ratios. We project that capital quality rises by 1.5% per year initially, then gradually decelerating. For land, the supply

> 23 The demographic projections are from the U.N. Population Division’s _World Population Prospects: 2012 Revision_ , downloaded from their web site, <u>http://esa.un.org/unpd/wpp/unpp/panel_population.htm</u> .

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