Abstract: This paper links the share of labor income with the factor price distortion and capital deepening to explain the decline of the share of labor income in China. On the one hand, based on the study of factor substitution elasticity and the relative distortion of factor prices since the 1990s, it is inferred and observed that the relative distortion of factor prices has negative effects on the share of labor income. On the other hand, rigorous econometric analysis also shows that the relationship between the share of labor income and the relative distortion of capital-labor prices changes in the opposite direction, while the relationship between the share of labor income and the ratio of interest rate to wage rate changes in the same direction. That is, the relative distortion of factor prices (Interest rate/wage rate ratio is artificially depressed) reduces the share of labor income in China. The conduction path is:the relative distortion of factor prices→capital-biased technological progress→capital deepening→decline of labor income share. To correct the relative distortion of factor prices, it is necessary to accelerate the market-oriented reform of factor markets.

Key words: factor substitution elasticity, factor price distortion, capital deepening, labor income share