Working Paper: NBER ID: w19324
Authors: Russell Cooper; Guan Gong; Ping Yan
Abstract: This paper studies the employment, productivity and welfare implications of new Chinese labor regulations intended to protect workers' employment conditions. We estimate a general equilibrium model of costly labor adjustment from data prior to the policy. Using the estimated parameters, we study the effects of the interventions. We find that increases in severance payments lead to a sizable increase in firm size, lower aggregate employment, a significant reduction in labor reallocation, an increase in the exit rate and a welfare loss. A policy of credit market liberalization will reduce firm size, increase aggregate employment, increase labor reallocation, wages and welfare. If in place at the time, these frictions would have reduced China's annual growth rate by 1.1 percentage points over the 1998-2007 period.
Keywords: Labor Regulations; China; General Equilibrium; Employment; Productivity
JEL Codes: E24; J08; J2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increases in severance payments (J65) | significant increase in firm size (L25) |
| increases in severance payments (J65) | decrease in aggregate employment (J63) |
| increases in severance payments (J65) | reduction in labor reallocation (J29) |
| 20% increase in severance payments (J65) | nearly 3% decline in productivity (O49) |
| 20% increase in severance payments (J65) | 9% reduction in output (E23) |
| 20% increase in severance payments (J65) | 6% reduction in welfare (H53) |
| credit market liberalization (F65) | increase in aggregate employment (J23) |
| credit market liberalization (F65) | labor reallocation (J69) |
| credit market liberalization (F65) | overall welfare (I31) |
| increases in severance payments (J65) | higher exit rates for firms (L26) |
| credit market liberalization (F65) | reduces exit rates (J63) |
| credit market liberalization (F65) | promotes employment (J68) |
| labor regulations (J88) | reduced China's annual growth rate (F62) |