In the housing sector, the capital-output ratio was below that in the United States until 2010 (Figure 15, Panel B). Since then the ratio for the housing sector in China has moved above that in the United States and this development will continue unless there is an abrupt fall in housing investment in China.

# **Total factor productivity growth by sector**

The incremental capital-output ratio is one measure of the efficiency with which capital is used but it is only a partial measure of the productivity of the economy. The overall efficiency of the economy is better measured by the productivity of both labor and capital – total factor productivity. Most growth accounting studies use the total amount of employment as the labor input and add a separate variable that measures the qualifications of the overall labor force. But the overall labor force is far from being homogenous. The growth accounting analysis assumes competitive markets, so employee compensation is assumed to reflect marginal productivity.

There is a long history of not using just the numbers employed as a measure of labor input. Kendrik (1956) argued for weighting physical labor inputs by a baes-period average compensation which, as Denison (1961) pointed out, enables the contribution of structural change in the distribution of labor in the economy to productivity growth be, at least partially, eliminated. Jorgenson (1991) argued for a much fuller decomposition of labor input covering education, age and gender with each input weighted by compensation.

# **_Labor quality indicators_**

A full decomposition of labor inputs by sector would be difficult to achieve in China due to lack of underlying data and restricted publication of data from labor market surveys. However, Wu _et al_ . (2015) have published estimates of average employee compensation by industry, which can be taken as a proxy of the quality of labor input by sector. Such data permit a breakdown of employee compensation by the sectors used in the analysis of capital formation (business and government/infrastructure). However, the business sector itself is far from homogenous. In particular it contains two extreme sectors, agriculture and sectors dominated by industrial SOEs (coal mining, petroleum extraction, tobacco, petroleum refining, transport equipment and utilities). The wage levels in these two sectors differ by a factor of over five. Consequently, changes in the share of employment in agriculture will change the average level of compensation, which is being taken as measure of the quality of the labor force.

**Table 8 Employment growth absolute and weighted by sectoral employee compensation**

||Employee<br>compensation|Employment|Employment|Employment weighted<br>by average<br>compensation|
|---|---|---|---|---|
||level, CNY per<br>year, 2010|Millions, 2010|Growth pa<br>1990-2016|Growth pa<br>1990-2016|
|Business|20,031|687.3|0.6|1.2|
|Agriculture|15,383|279.3|-2.3|**--**|
|Remainder|20,650|408.0|3.5|**--**|
|Government and Infrastructure|29,871|73.7|1.1|**--**|
|Whole economy|21,523|761.1|0.7|1.2|

_Source:_ NBS and Wu (2015) for Industrial SOEs and government/infrastructure Labor input into the business sector on a weighted basis grows faster than the unweighted series as there is a move out of agriculture into the rest of the business sector (Table 8). Hence the growth in 23