Does government investment push up manufacturing labor costs? Evidence from China

China’s labor costs have risen rapidly compared with other emerging market countries in recent years. Government investment is an essential factor pushing labor costs, a unique and exciting phenomenon in China. This paper explains why labor costs in China’s industrial manufacturing industry have rapidly increased from the local government investment perspective. First, the government’s preference for investment in infrastructure construction creates labor demand and drives up labor costs. Second, the improvement of infrastructure lowers the transaction costs of the enterprise sector, thus expanding the scale of production and triggering a rise in labor costs. The empirical results show that for every 1% increase in government investment, the unit labor cost increases by 0.0013 units, and the nominal labor cost increases by 1.443 units. A series of robustness tests support the results. China should rationally control the scale of government investment so that labor costs are in a moderate growth range and then promote the sustainable development of enterprises.