| Abstract | The concern about the labor-cost-push inflation is increasing with the structural change in labor supply, especially with the rapidly rising average labor reward. At the same time, the debate about whether inflation in China is cost-push or demand-pull becomes more and more fierce. This paper estimates two kinds of unit labor cost in China since 2001, and empirically tests the drivers of inflation in China based on the extended Phillips curve and VAR model. The result indicates that the informal sectors are not the source of labor-cost-push inflation, as their labor productivity increases faster than labor reward, while the formal sectors are the main source of labor-cost-push inflation due to their labor productivity lower than labor reward. The aggregate demand measured by output gap has been the primary factor of the inflation in China since the new century, and the effect of unit labor cost of the formal sectors is statistically significant and lasts longer which implies medium and long term inflation pressure. Looking ahead, labor cost pressure for inflation will increase with the demographic change and the reform of income distribution. From a policy perspective, on the one hand, the aggregate demand and the relevant monetary base should be in control, on the other hand, the supply side should be emphasized to release the medium and long term inflation pressure, such as the deregulation, breaking the monopoly, , promoting fair competition, implementing structural tax cut, to improve the supply efficiency. |