Labor Costs and Domestic Value Added: Evidence Based on the China's New Labor Contract Law
42 Pages Posted: 4 Oct 2023
Abstract
This paper investigates the impact of labor costs on the domestic value added (DVA) at the firm-level. To establish causality, we use the quasi-natural experiment of the implementation of China’s new Labor Contract law , which leads to a sudden increase in labor costs, to conduct a difference-in-differences (DID) estimation. We find that an increase in labor costs significantly and persistently increases firms’ DVA. Mechanism analyses suggest that these effects are mainly driven by changes in firms’ trading patterns (from processing trades to ordinary trades), progress in process innovation, and increased product market power. Moreover, our results are stronger for upstream firms far from final consumption, firms with low product quality, non-state-owned firms, and firms located in areas with high market competition or strong legal environmental protection. Overall, this paper investigates a determinant of DVA and adds evidence to the economic implications of China’s new Labor Contract law.
Keywords: Labor costs, Domestic value added, China's new Labor Contract law
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