The Political Economy of Labor-Employment Decisions: Evidence from China
50 Pages Posted: 31 May 2016 Last revised: 11 Mar 2019
Date Written: March 9, 2019
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: Suggested Citation