Do VAT cuts help stabilize employment? Evidence from China’s VAT rate reform

Xiufen Liu, Hongsheng Fang, Lexin Zhao and Wenli Xu

Economic Analysis and Policy, 2023, vol. 78, issue C, 190-207

Abstract: This paper develops a simple model to study the influence of China’s value-added tax (VAT) rate reform on employment. The model delivers important information about how monopoly and unskilled labor enhances the substitution of non-labor factors for labor. Taking China’s VAT rate reform as a quasi-natural experiment, this paper examines the model’s predictions with a difference-in-differences (DID) approach. The results suggest that China’s VAT rate reform has a negative employment effect and that the decrease in the relative price of non-labor inputs to labor serves as an important channel through which non-labor factors squeeze labor out. Reducing the degree of market monopoly and improving the skill level of labor can effectively mitigate the adverse impact of the reform on employment.

Keywords: VAT rate; Tax reduction; Employment; Labor demand (search for similar items in EconPapers)
JEL-codes: G38 H22 H32 J21 J23 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0313592623000255
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:78:y:2023:i:c:p:190-207

DOI: 10.1016/j.eap.2023.03.005

Access Statistics for this article

Economic Analysis and Policy is currently edited by Clevo Wilson

More articles in Economic Analysis and Policy from Elsevier
Bibliographic data for series maintained by Catherine Liu ().