The Political Economy of Labor-Employment Decisions: Evidence from China

Management Science

50 Pages Posted: 31 May 2016 Last revised: 11 Mar 2019

See all articles by Zhaoyang Gu

Zhaoyang Gu

Chinese University of Hong Kong - School of Accountancy

Song Tang

Shanghai University of Finance and Economics - School of Accountancy; Shanghai University of Finance and Economics - Institute of Accounting and Finance

Donghui Wu

The Chinese University of Hong Kong; Center for Institutions and Governance

Date Written: March 9, 2019

Abstract

In China’s transitional economy, one of the major objectives of the government is to maintain social stability. We hypothesize that, through state ownership and appointment of executives, Chinese government officials can influence firms’ labor-employment decisions by limiting layoffs when firms’ sales decline. Consistent with this hypothesis, we find that state-owned enterprises (SOEs) have stickier labor costs than non-SOEs, and the presence of politically connected managers makes labor costs even stickier in SOEs while having little effect in non-SOEs. Such effects are stronger in regions with weak market institutions and during time periods when government officials are to be promoted. We also show that the government reciprocates SOEs’ sticky labor policies with subsequent subsidies.

Keywords: SOEs; Political connection; Labor costs; Cost stickiness

JEL Classification: P26; J30; M41

Suggested Citation

Gu, Zhaoyang and Tang, Song and Wu, Donghui, The Political Economy of Labor-Employment Decisions: Evidence from China (March 9, 2019). Management Science, Available at SSRN: https://ssrn.com/abstract=2786533 or http://dx.doi.org/10.2139/ssrn.2786533

Zhaoyang Gu

Chinese University of Hong Kong - School of Accountancy ( email )

Shatin, N.T.
Hong Kong

Song Tang

Shanghai University of Finance and Economics - School of Accountancy ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China
86-21-6590 4842 (Phone)

Shanghai University of Finance and Economics - Institute of Accounting and Finance ( email )

Shanghai, 200433
China
86-21-6590 4842 (Phone)

Donghui Wu (Contact Author)

The Chinese University of Hong Kong ( email )

Sha Tin
N.T.
Hong Kong
852-3943 7836 (Phone)
852-2603 5114 (Fax)

HOME PAGE: http://www.bschool.cuhk.edu.hk/staff/wu-donghui/

Center for Institutions and Governance ( email )

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HOME PAGE: http://www.bschool.cuhk.edu.hk/centres/centre-for-institutions-and-governance/

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