Labor Costs and Domestic Value Added: Evidence Based on the China's New Labor Contract Law

42 Pages Posted: 4 Oct 2023

See all articles by Shasha Liu

Shasha Liu

School of Management, Jinan University

Yifan Jin

Jinan University

Dongmin Kong

School of Economics, Huazhong University of Science and Technology

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

Suggested Citation

Liu, Shasha and Jin, Yifan and Kong, Dongmin, Labor Costs and Domestic Value Added: Evidence Based on the China's New Labor Contract Law. Available at SSRN: https://ssrn.com/abstract=4592137 or http://dx.doi.org/10.2139/ssrn.4592137

Shasha Liu

School of Management, Jinan University ( email )

No. 601, West Huangpu Road
Guangzhou, Guangdong 510632
China

Yifan Jin

Jinan University ( email )

Huang Pu Da Dao Xi 601, Tian He District
Guangzhou, 510632
China

Dongmin Kong (Contact Author)

School of Economics, Huazhong University of Science and Technology ( email )

Bldg. of Econ. School, Louyu Rd. 1037#
HUST, Hongshan Dist.
Wuhan, Hubei 430074
China

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