Costly Labor Adjustment: General Equilibrium Effects of China's Employment Regulations

Russell Cooper, Guan Gong and Ping Yan

No 19324, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies the employment, productivity and welfare implications of new Chinese labor regulations intended to protect workers' employment conditions. We estimate a general equilibrium model of costly labor adjustment from data prior to the policy. Using the estimated parameters, we study the effects of the interventions. We find that increases in severance payments lead to a sizable increase in firm size, lower aggregate employment, a significant reduction in labor reallocation, an increase in the exit rate and a welfare loss. A policy of credit market liberalization will reduce firm size, increase aggregate employment, increase labor reallocation, wages and welfare. If in place at the time, these frictions would have reduced China's annual growth rate by 1.1 percentage points over the 1998-2007 period.

JEL-codes: E24 J08 J2 (search for similar items in EconPapers)
Date: 2013-08
New Economics Papers: this item is included in nep-lab, nep-mac and nep-tra
Note: EFG
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Citations: View citations in EconPapers (3)

Published as The Economic Journal, Volume 128, Issue 613 August 2018 Pages 1879-1922

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