Abstract
This study discusses the role of firm risks in the declining labor share in China. Based on the model of Holmström and Milgrom (1987), it’s demonstrated that the lower firm risks can motivate workers to work harder, leading to promoted output per worker and average wage. However, the increase in output will be larger, thus depressing the labor share. The empirical evidence supports our hypothesis, and performs robust across various model specifications and proxies for firm risks, indicating a positive correlation between labor share and firm risks.