Labor Protection, Firms’ Risk-Taking Behavior, and Industrial Upgrading: Evidence from China's New Labor Contract Law

Abstract

China’s new Labor Contract Law (LCL), which came into force in 2008, has greatly improved the protection of workers and increased the cost of labor. This study investigates its effect on firms’ risk-taking behavior and industrial upgrading. The analysis finds strong and robust evidence that the LCL increased the risk-taking of firms in industries with higher labor intensity. The increased risk-taking mainly arose among firms in regions with strict law enforcement, firms that were less law abiding before the new LCL, as well as non-state-owned firms and efficient firms. Moreover, risk-taking behavior taken by efficient firms within industries produced an industry-level effect. The findings show that after the implementation of the new LCL, the upgrading process of labor-intensive industries accelerated significantly, which is reflected in improvements in total factor productivity, technology sophistication, output of new products, and value added.

Keywords: Labor Protection, Transformation and Upgrading, risk-taking, china, Labor Contract Law