business sector productivity is slightly faster when measured with a weighted labor input than when measured with an unweighted input. Similarly, in the whole economy quality adjusted labor input grows faster than the numbers employed.

In addition to the impact of changes in the industrial structure of employment, the skill level of the labor force has been steadily increasing, with the average number of years of schooling of the population aged 25 to 64 rising by 1.2% per year. International experience suggests that an additional year of education raises the level of earnings (hence productivity) by 7%.<sup>2</sup> On this basis, the years of education series has been transformed to a human capital index by exponentiating the rate of return by the number of years of education. Such a transformation halves the growth rate of human capital relative to the growth of earnings.

# **_Income shares_**

A measure of total factor productivity also requires a weighting system to combine capital and labor, usually taken to be the share of value-added coming from labor and capital. Such data are provided by the Chinese input-output table but not in enough detail to isolate the sectors used in this study. Wu et al (2015) have provided a slightly more granular IO table covering 37 industries from 1990 to 2010, with nine observations corresponding to the published IO tables. These sectors do not correspond exactly to those used in this paper for two reasons: culture, entertainment and household services are classified as one sector by the CIP data while this paper has allocated culture and entertainment to the government sector. As the bulk of value-added in the CIP sector comes from household services, this sector has been allocated to the business sector. Secondly, the housing sector is kept as part of the real estate sector in the CIP data. In this paper, the housing sector is excluded from real estate by deducting capital consumption of housing from the CIP real estate sector and its addition to the government and infrastructure sectors. The overall result is to show the compensation share to be just over half between 1990 and 2010 with a falling trend between 1997 and 2007 as reforms steadily raised efficiency and profitability (Table 9). Over the following five years there was a slight recovery in the labor share in business sector value-added.

**Table 9 Share of value added at basic prices**

Average 1990 to 2010

||Business|Government,<br>Infrastructure, housing|Whole<br>economy|
|---|---|---|---|
|Compensation of employees|0.544|0.595|0.554|
|Operating surplus|0.287|0.136|0.261|
|Capital consumption|0.169|0.269|0.185|
|Value added at basic prices|1.000|1.000|1.000|
|Production taxes|0.198|0.056|0.189|

_Source:_ Wu _et al._ (2015) CIP project and NBS.

Using these shares, the total factor input for the two sectors and the whole economy has been calculated and so the level of total factor productivity has been calculated year by year from 1990 to 2016. The resulting series can be volatile depending on the cyclical position of the economy. To view

> 2 In China, empirical estimates suggest that the average increase in earnings per year of schooling increased from around 2.5% per year in 1990 to 10% by 2004 and has remained at that level since then. On average, this time path corresponds to the average increase in earnings of 8.0% per year (Wang and Yue, 2009, quoted in ADB 2015).

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