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The dynamic demand for capital and labor: Evidence from Chinese industrial firms

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  • Tang, Le

Abstract

This paper employs a structural econometric approach to study the joint dynamic demand for capital and labor in Chinese firms. We recover key structural parameters in a dynamic model of interrelated factor demand subject to joint convex and non-convex costs. The model is able to replicate the stylized facts directly observed from Chinese manufacturing firm-level data over the period 1998–2007. Our estimations reveal that firms exhibit significant convex and fixed costs when adjusting capital or employment stock. Moreover, the adjustments in two factor inputs are inter-related, and adjusting capital and labor simultaneously is more costly than adjusting two inputs sequentially. Our counterfactual analysis suggests that removing the frictions in both capital and labor adjustments will lead to a 1% increase in aggregate total factor productivity (TFP) and a 7% increase in aggregate output.

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  • Tang, Le, 2022. "The dynamic demand for capital and labor: Evidence from Chinese industrial firms," Economic Modelling, Elsevier, vol. 107(C).
    • Handle: RePEc:eee:ecmode:v:107:y:2022:i:c:s0264999321003205
    DOI: 10.1016/j.econmod.2021.105731
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    Cited by:

    1. Ding, Sai & Jiang, Wei & Li, Shengyu & Wei, Shang-Jin, 2024. "Fiscal policy volatility and capital misallocation: Evidence from China," European Economic Review, Elsevier, vol. 167(C).
    2. Zhang, Qi-nan & Zhang, Fan-fan & Mai, Qiang, 2023. "Robot adoption and labor demand: A new interpretation from external competition," Technology in Society, Elsevier, vol. 74(C).
    3. Tang, Le, 2023. "SOEs reform and capital efficiency in China: A structural analysis," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 1-20.
    4. Amundsen, Alexander, 2023. "Interaction effects in the adjustment cost function of firms," Journal of Economic Dynamics and Control, Elsevier, vol. 146(C).
    5. Vu Thi Kim Hanh & Nguyen Hong Nga, 2023. "The effect of labor and capital on transportation logistics’ development: The case of Ho Chi Minh, Vietnam," Cogent Economics & Finance, Taylor & Francis Journals, vol. 11(1), pages 2189562-218, December.
    6. Tang, Le & Jefferson, Gary, 2024. "A DSGE model of energy efficiency with vintage capital in Chinese industry," Economic Modelling, Elsevier, vol. 132(C).
    7. Heng Chen & Yan Zhang, 2022. "Research on the Path of Sustainable Development of China’s Logistics Industry Driven by Capital Factors," Sustainability, MDPI, vol. 15(1), pages 1-26, December.

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    More about this item

    Keywords

    Adjustment costs; Investment dynamics; Labor demand; Interrelation; China;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • P23 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Factor and Product Markets; Industry Studies; Population

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