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The Political Economy of Labor Employment Decisions: Evidence from China

Author

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  • Zhaoyang Gu

    (School of Accountancy, The Chinese University of Hong Kong, Hong Kong Special Administration Region, China;)

  • Song Tang

    (School of Accountancy and the Institute of Accounting and Finance, Shanghai University of Finance and Economics, 200433 Shanghai, China)

  • Donghui Wu

    (School of Accountancy, The Chinese University of Hong Kong, Hong Kong Special Administration Region, China;)

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.

Suggested Citation

  • Zhaoyang Gu & Song Tang & Donghui Wu, 2020. "The Political Economy of Labor Employment Decisions: Evidence from China," Management Science, INFORMS, vol. 66(10), pages 4703-4725, October.
    • Handle: RePEc:inm:ormnsc:v:66:y:2020:i:10:p:4703-4725
    DOI: 10.1287/mnsc.2019.3345
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