Abstract:

This paper investigates the impact of the 2007 Labor Contract Law of the People’s Republic of China. Focusing on the two key provisions of the law, mandated permanent employment status for employees who have been with the firm for over ten years and an increase in enforcement, we investigate the impact of the law at the firm level. Accessing firm specific professional and education composition data for listed firms’ labor forces, we investigate two questions: first, does the labor law change the composition and compensation of the labor force? Second, do the labor force changes have economic consequences for the firm? Focusing first on aggregated results, we then investigate firms’ differential reactions to the labor law. We find important caveats to the general results that depend on institutions, location, labor and product markets and strategies. Finally, we provide results on the effect that the law has on the composition of the labor force in the presence of economic growth.