Government Employment Target Pressure and Labor Investment Efficiency in China: A Political Economy Perspective

This research paper delves into the intricate relationship between government policies, corporate behavior, and labor investment efficiency (LIE) within the unique context of China’s transitional economy. Drawing on a sample of domestically listed non-financial A-share listed companies in China from 2007 to 2019, we find that government employment target pressure decreases corporate LIE, which derives from overinvestment in labor. Mechanical tests show that this government-corporate cooperation under government employment target pressure is resultant of the incentives for firms to obtain subsequent government support and for governments to achieve future social stability. Further analysis suggests that employment target pressure can also lead firms to increase low-quality human resources and decrease high-quality human resources. The negative effect of government employment target pressure on LIE is only present in local state-owned enterprises (SOEs) and private firms, and more pronounced when the mayor of the city where the enterprise is located is nearing retirement and when firms are facing greater pressure from industry competition. Our study extends the traditional agency theory framework, highlighting the interplay between government influences and corporate decision-making in economies where the government holds substantial influence. We explore how government employment targets, initially aimed at societal goals, intertwine with corporate strategies, shaping labor investment decisions. This research offers new perspectives on the drivers of corporate behavior and the optimization of labor investment strategies in the presence of political pressures. For managers, our findings underscore the need for a strategic approach that balances short-term compliance with government targets and long-term LIE. Policymakers can benefit from insights into the potential unintended consequences of government employment target pressure, encouraging the design of more effective policy frameworks that align short-term employment targets with long-term economic growth and resource optimization. This study contributes to the growing literature on government-corporate relationships and provides valuable insights into the complex interplay between government policies and corporate decision-making in a transitional economy like China.