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Costly Labour Adjustment: General Equilibrium Effects of China's Employment Regulations and Financial Reforms

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  • Russell Cooper
  • Guan Gong
  • Ping Yan

Abstract

This article studies the employment and productivity implications of new Chinese labour regulations. We estimate a general equilibrium model of costly labour adjustment from data prior to the policy to study the effects of the interventions. Increases in severance payments are particularly effective and lead to sizable private sector responses. If in place at the time, these frictions would have reduced China's annual growth rate by nearly 1 percentage point between 1998 and 2007, a period of intense privatisation. Credit market liberalisation reduces private firm size and increases private sector employment, labour reallocation, wages and output.

Suggested Citation

  • Russell Cooper & Guan Gong & Ping Yan, 2018. "Costly Labour Adjustment: General Equilibrium Effects of China's Employment Regulations and Financial Reforms," Economic Journal, Royal Economic Society, vol. 128(613), pages 1879-1922, August.
    • Handle: RePEc:wly:econjl:v:128:y:2018:i:613:p:1879-1922
    DOI: 10.1111/ecoj.12528
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    Cited by:

    1. Rodrigue, Joel & Shi, Qing & Tan, Yong, 2024. "Trade policy uncertainty & resource misallocation," European Economic Review, Elsevier, vol. 164(C).
    2. Wu, Bangzheng & Yue, Pengpeng & Zuo, Shengqiang, 2023. "Borrow to be the poor or the rich? It depends: Credit market and wealth accumulation," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 804-821.
    3. Weng, Liying & Xu, Changsheng & Yi, Ming, 2024. "Resource misallocation in China: Biased subsidies versus credit discrimination," Economic Modelling, Elsevier, vol. 134(C).
    4. Jacoby, Gady & Liao, Chi & Lu, Xiaomeng & Wan, Fang, 2023. "The effect of fraud experience on investment behavior," Emerging Markets Review, Elsevier, vol. 55(C).
    5. Coşkun, Sevgi, 2022. "Informal employment and business cycles in emerging market economies," Journal of Macroeconomics, Elsevier, vol. 74(C).
    6. Anh Tuan Bui & Thu Phuong Pham, 2021. "Financial and Labour Obstacles and Firm Employment: Evidence from Europe and Central Asia Firms," Sustainability, MDPI, vol. 13(15), pages 1-18, August.
    7. Tang, Le, 2022. "The dynamic demand for capital and labor: Evidence from Chinese industrial firms," Economic Modelling, Elsevier, vol. 107(C).
    8. Feng, Shuaizhang & Guo, Naijia, 2021. "Labor market dynamics in urban China and the role of the state sector," Journal of Comparative Economics, Elsevier, vol. 49(4), pages 918-932.
    9. Le Tang & Jun Zhang & Jim Huangnan Shen, 2024. "Capital misallocation in Chinese industrial firms," Scottish Journal of Political Economy, Scottish Economic Society, vol. 71(1), pages 75-100, February.
    10. Li, Zheng & Gao, Shan & Song, Shunfeng, 2023. "Labor protection, labor costs, and China's outward foreign direct investment," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 444-459.

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