Political Economy of Labor Retrenchment:Evidence Based on China's State-Owned Enterprises

Abstract

This study examines the determinants of the restructuring of China's SOEs in the late 1990s. Our study yields four major findings. First, we find that the degree of labor retrenchment is negatively related to enterprise performance, suggesting that poor performance is a major force driving labor restructuring. Second, we find that market competition is related to both traditional and corporatized SOEs, suggesting that market competition gradually becomes an effective disciplinary force for managers of China's SOEs. Furthermore, we offer evidence that decisions about labor retrenchment in traditional SOEs are related to the local government's fiscal position and to local reemployment conditions for laid-off workers. In contrast, labor decisions in corporatized SOEs are not related to these two variables. This suggests that corporatized SOEs with partial private ownership seem to enjoy higher autonomy in labor decisions.

Keywords: Political Control, State Owned Enterprises, Labor Restructuring

JEL Classification: P26, P31, G38