Revisit the Nexus between Saving and Inequality in Labor Intensive Economies: Evidence from China

Using an extended overlapping generations (OLG) model, we theoretically prove that functional inequality resulting from weak labor bargaining power can be a key driver of high saving rates, as observed in China and other labor-abundant Asian emerging markets. Income distribution that favors capital over labor may attract excess capital investments and hence lead to high saving rates. The link between inequality and saving is especially prominent for the household sector because excess return on capital motivates the working-age population to increase their retirement savings. We also find empirical support for our theoretical predictions using China’s sectoral-level data.