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

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Listed:
  • Liu, Xiufen
  • Fang, Hongsheng
  • Zhao, Lexin
  • Xu, Wenli

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.

Suggested Citation

  • Liu, Xiufen & Fang, Hongsheng & Zhao, Lexin & Xu, Wenli, 2023. "Do VAT cuts help stabilize employment? Evidence from China’s VAT rate reform," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 190-207.
    • Handle: RePEc:eee:ecanpo:v:78:y:2023:i:c:p:190-207
    DOI: 10.1016/j.eap.2023.03.005
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    More about this item

    Keywords

    VAT rate; Tax reduction; Employment; Labor demand;
    All these keywords.

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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