Working Paper: NBER ID: w17948
Authors: Russell Cooper; Guan Gong; Ping Yan
Abstract: This paper studies the employment and productivity implications of new labor regulations in China. These new restrictions are intended to protect workers' employment conditions by, among other things, increasing firing costs and increasing compensation. We estimate a model of costly labor adjustment from data prior to the policy. We use the estimated model to simulate the effects of the policy. We find that increases in severance payments lead to sizable job creation, a significant reduction in labor reallocation and an increase in the exit rate. A policy of credit market liberalization will reduce employment, slightly increase labor reallocation and reduce exit. The estimated elasticity of labor demand is about unity so that an increase in the base wage leads to sizable job losses.
Keywords: Labor Regulations; Employment; Productivity; China; Severance Payments
JEL Codes: E24; J08; J23; O38; O53; P2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased firing costs (L97) | Deter hiring (J63) |
| Increased firing costs (L97) | Protect existing jobs (J68) |
| Increased costs of labor adjustments (J39) | Less efficient allocation of labor (J29) |
| Increases in severance payments (J65) | Job creation (J23) |
| Increases in severance payments (J65) | Reduction in labor reallocation (J29) |
| Increases in severance payments (J65) | Increased exit rate from industries (L99) |
| Increase in base wages (J31) | Decrease in employment (J63) |
| Liberalization of credit markets (F65) | Diminished employment effects of severance pay (J65) |