China's Labor Market Distortion and Excess Liquidity

The excess liquidity is one major problem China faced today. This paper analyzes the effect of the labor market distortion on excess liquidity by establishing a simple AD-AS model and then uses the relevant data as empirical test. Results show that the imbalance of macro-economy brought by the labor market distortion is the main reason for China's excess liquidity. In a closed economy, labor market distortion results in shortage of domestic demand, speedy increasing of investment and excess production capability of enterprises and thus results in the internal imbalance; and further that, with the combination of internal imbalance and open economy environment, the export increases faster than the import, thus the trade surplus continues to expand; in China's current foreign exchange management system, the expand of trade surplus will inevitably lead to excess liquidity. So taking efficient measures to mitigate the labor market distortion is the key element to solve China's excess liquidity.