An examination of the impact of labor laws on the firms' operation and performance in China

Abstract

This thesis provides an overall evaluation of the impact of labor market interventions through the implementation of the Labor Contract Law (LCL) in 2008 in China. To begin, a transaction cost explanation of the choice of contract in a free market is established. It argues that the choice of contract is a comparison between related transaction costs and functions as a theoretical base for the thesis. In the scenario with labor market intervention, the theoretical framework predicts that alternative production function or contractual arrangements will be adopted by firms to avoid the direct impact of labor laws. Two areas of interest were studied empirically. One is employment conflicts. In the short-run, the number of labor disputes significantly correlates with mandated benefits coverage and low-skilled employment ratio. Such correlation weakens in the long-run, possibly due to changes in firms' strategies. The other is capital deepening, and related efficiency impact. It is found that the capital: labor ratio in private firms increased dramatically after the implementation of the LCL, with a decline in total factor productivity. This evaluation conclusively rejects the claims of supporters that labor market interventions reduce social conflict, and finds evidence that confirms the negative efficiency effect of these regulations on Chinese firms, especially small enterprises. It provides the necessary policy evaluation for the Chinese government to conduct the relevant reform.