China’s labor-capital ratio human capital accumulation, and labor wage: an empirical analysis using a VAR model

China’s labor-capital ratio (L-C ratio) has fallen sharply over the past two decades, indicating that labor is increasingly being replaced by capital. However, research on the L-C ratio trend is inadequate, especially regarding the driving force and its impact. This study focuses on the relationship between China’s L-C ratio and human capital accumulation by applying the panel vector auto-regression (PVAR) approach. Using a panel data of 30 Chinese provinces for 1997–2014, the analysis yields the following findings: First, the L-C ratio has a negative impact on human capital accumulation, suggesting that the major driving force of the L-C ratio’s sharp decline is the demand-side driving force, rather than the supply-side. Second, the decline of the L-C ratio is majorly driven by the demand-side factors after the Labor Contract Law, but by the supply-side factors before the law, suggesting that the Labor Contract Law has greatly changed the demand-supply balance of China’s labor market. Third, the L-C ratio has a negative effect on labor wages by increasing regional human capital accumulation, suggesting that employees can increase their wages through human capital investment in reaction to the decline in the L-C ratio.