Digital Gains: FinTech Development and Labour Share

Abstract

Capital market development and technological innovation affect the labour income share and resource allocation, but the link between financial innovation and the labour share remains unclear. This paper examines the labour income share through the lens of financial innovation. Using the Bartik (1991) instrumental variable approach and a difference-in-differences estimation, we document a positive and casual relationship between local FinTech development and the labour income share among Chinese firms. Mechanism analyses suggest local FinTech development alleviates financing constraints, optimises resource allocation and improves the structure of human capital, leading to a higher labour income share of firms. The positive effects of local FinTech development are stronger for firms in industries or regions with inefficient resource allocation, for smaller non-state-owned enterprises and for firms with greater access to educational resources. Overall, our results highlight the role of FinTech development in improving capital allocation efficiency, shaping the distribution of labour and enhancing social welfare.