Costly Labor Adjustment: General Equilibrium Effects of China's Employment Regulations

40 Pages Posted: 17 Aug 2013

See all articles by Russell Cooper

Russell Cooper

University of Texas at Austin - Department of Economics; National Bureau of Economic Research (NBER)

Guan Gong

Shanghai University of Finance and Economics

Ping Yan

Peking University - National Policy Lab, National School of Development

Date Written: August 2013

Abstract

This paper studies the employment, productivity and welfare implications of new Chinese labor regulations intended to protect workers' employment conditions. We estimate a general equilibrium model of costly labor adjustment from data prior to the policy. Using the estimated parameters, we study the effects of the interventions. We find that increases in severance payments lead to a sizable increase in firm size, lower aggregate employment, a significant reduction in labor reallocation, an increase in the exit rate and a welfare loss. A policy of credit market liberalization will reduce firm size, increase aggregate employment, increase labor reallocation, wages and welfare. If in place at the time, these frictions would have reduced China's annual growth rate by 1.1 percentage points over the 1998-2007 period.

Suggested Citation

Cooper, Russell W. and Gong, Guan and Yan, Ping, Costly Labor Adjustment: General Equilibrium Effects of China's Employment Regulations (August 2013). NBER Working Paper No. w19324. Available at SSRN: https://ssrn.com/abstract=2311573

Russell W. Cooper (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Guan Gong

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Ping Yan

Peking University - National Policy Lab, National School of Development ( email )

China

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