IDEAS home Printed from https://ideas.repec.org/a/bla/chinae/v34y2026i2p32-66.html

Tax Incentives and Firm Skill Composition: Evidence from China's Employee Training Deduction Reform

Author

Listed:
  • Ce Huang
  • Xiaoshu Jin
  • Rong Liu
  • Ruiting Wang

Abstract

This study investigated how changes in China's tax policy regarding firms' employee training expenses affected the proportion of high‐skilled employees. Focusing on a 2018 tax reform that raised the pretax deduction limit for employee training expenses, it analyzed data from listed companies using a difference‐in‐differences approach. The reform increased the share of high‐skilled employees in affected firms. The proportion of technical personnel rose by 1.22 percentage points, with stronger effects in firms that had higher pre‐reform training expenses, lower financial constraints, and greater capital intensity. Internal training and employee upward mobility were the main drivers, with a 24 percent rise in average training expenses per employee, primarily for front‐line staff. There was a modest increase in research and development intensity and no reduction in average wages. Targeted tax incentives can thus encourage human capital investment and enhance workforce skill composition without adverse wage effects.

Suggested Citation

  • Ce Huang & Xiaoshu Jin & Rong Liu & Ruiting Wang, 2026. "Tax Incentives and Firm Skill Composition: Evidence from China's Employee Training Deduction Reform," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 34(2), pages 32-66, March.
    • Handle: RePEc:bla:chinae:v:34:y:2026:i:2:p:32-66
    DOI: 10.1111/cwe.70016
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/cwe.70016
    Download Restriction: no
    File URL: https://libkey.io/10.1111/cwe.70016?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Tian, Binbin & Lin, Chao & Zhang, Wenwen & Feng, Chen, 2022. "Tax Incentives, On-the-job Training, and Human Capital Accumulation: Evidence from China," China Economic Review, Elsevier, vol. 75(C).
    2. Bosetti, Valentina & Cattaneo, Cristina & Verdolini, Elena, 2015. "Migration of skilled workers and innovation: A European Perspective," Journal of International Economics, Elsevier, vol. 96(2), pages 311-322.
    3. Kimin Kim & Myoung-jae Lee, 2019. "Difference in differences in reverse," Empirical Economics, Springer, vol. 57(3), pages 705-725, September.
    4. Daron Acemoglu & Jorn-Steffen Pischke, 1999. "The Structure of Wages and Investment in General Training," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 539-572, June.
    5. Ashesh Rambachan & Jonathan Roth, 2023. "A More Credible Approach to Parallel Trends," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(5), pages 2555-2591.
    6. Anastassia Fedyk & James Hodson, 2023. "Trading on Talent: Human Capital and Firm Performance," Review of Finance, European Finance Association, vol. 27(5), pages 1659-1698.
    7. Mikaela Backman, 2014. "Human capital in firms and regions: Impact on firm productivity," Papers in Regional Science, Wiley Blackwell, vol. 93(3), pages 557-575, August.
    8. Gary S. Becker, 1962. "Investment in Human Capital: A Theoretical Analysis," Journal of Political Economy, University of Chicago Press, vol. 70(5), pages 1-9.
    9. Charles J. Hadlock & Joshua R. Pierce, 2010. "New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index," The Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1909-1940.
    10. Sawada, Yasuyuki & Aida, Takeshi & Griffen, Andrew S. & Kozuka, Eiji & Noguchi, Haruko & Todo, Yasuyuki, 2022. "Democratic institutions and social capital: Experimental evidence on school-based management from a developing country," Journal of Economic Behavior & Organization, Elsevier, vol. 198(C), pages 267-279.
    11. Barron, John M & Black, Dan A & Loewenstein, Mark A, 1989. "Job Matching and On-the-Job Training," Journal of Labor Economics, University of Chicago Press, vol. 7(1), pages 1-19, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Huang, Jianye & Li, Yuting & Wang, Shuai & Zhang, Jingkun, 2024. "Tax credits for employee education expenses and firm-specific human capital accumulation: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    2. Popov, Alexander, 2014. "Credit constraints and investment in human capital: Training evidence from transition economies," Journal of Financial Intermediation, Elsevier, vol. 23(1), pages 76-100.
    3. C. Jeffrey Waddoups, 2012. "Employer-Sponsored Training and Longer-Tenured Workers: Evidence from A ustralia," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 51(4), pages 966-986, October.
    4. Dan A. Black & Lars Skipper & Jeffrey A. Smith & Jeffrey Andrew Smith, 2023. "Firm Training," CESifo Working Paper Series 10268, CESifo.
    5. Huiqiang Ni & Zhen Yang & Wenlong Liu & Jianxia Cui, 2025. "Pre-Tax Deduction Policy for Employee Education Expenses and Corporate Digital Transformation: Evidence From China," SAGE Open, , vol. 15(2), pages 21582440251, June.
    6. Giorgio Brunello & Maria De Paola, 2004. "Market Failures and the Under-Provision of Training," CESifo Working Paper Series 1286, CESifo.
    7. Priyam Saraf, 2017. "On-the-Job Training," World Bank Publications - Reports 27290, The World Bank Group.
    8. Almeida, Rita & Carneiro, Pedro, 2009. "The return to firm investments in human capital," Labour Economics, Elsevier, vol. 16(1), pages 97-106, January.
    9. Christophe Muller & Christophe J. Nordman, 2017. "Wages and on-the-job training in Tunisia," Middle East Development Journal, Taylor & Francis Journals, vol. 9(2), pages 294-318, July.
    10. Moretti, Luca & Mayerl, Martin & Mühlemann, Samuel & Schlögl, Peter & Wolter, Stefan C., 2017. "So Similar and Yet So Different: A Comparative Analysis of a Firm's Cost and Benefits of Apprenticeship Training in Austria and Switzerland," IZA Discussion Papers 11081, IZA Network @ LISER.
    11. Teixeira, Aurora A.C. & Tavares-Lehmann, Ana Teresa, 2014. "Human capital intensity in technology-based firms located in Portugal: Does foreign ownership matter?," Research Policy, Elsevier, vol. 43(4), pages 737-748.
    12. Sauermann, Jan, 2015. "Worker Reciprocity and the Returns to Training: Evidence from a Field Experiment," IZA Discussion Papers 9179, IZA Network @ LISER.
    13. Bert Minne & Marc van der Steeg & Dinand Webbink, 2008. "Skill gaps in the EU: role for education and training policies," CPB Document 162, CPB Netherlands Bureau for Economic Policy Analysis.
    14. Hans Dietrich & Harald Pfeifer & Felix Wenzelmann, 2016. "The more they spend, the more I earn? Firms' training investments and post-training wages of apprentices," Economics of Education Working Paper Series 0116, University of Zurich, Department of Business Administration (IBW).
    15. Maria De Paola & Vincenzo Scoppa, 2002. "Firms' Training Decisions and Unemployment in Italian Labour Markets," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 61(1), pages 103-126, June.
    16. Kristjan-Olari Leping, 2005. "Measuring the Specificity of Human Capital: a Skill-based Approach," Working Papers 134, Tallinn School of Economics and Business Administration, Tallinn University of Technology.
    17. Pardesi, Mantej, 2024. "Productivity convergence and firm’s training strategy," ROA Research Memorandum 003, Maastricht University, Research Centre for Education and the Labour Market (ROA).
    18. Kong, Dongmin & Zhang, Bohui & Zhang, Jian, 2022. "Higher education and corporate innovation," Journal of Corporate Finance, Elsevier, vol. 72(C).
    19. Reinowski, Eva & Sauermann, Jan, 2008. "Hat die Befristung von Arbeitsverträgen einen Einfluss auf die Weiterbildung geringqualifiziert beschäftigter Personen?," IWH Discussion Papers 2/2008, Halle Institute for Economic Research (IWH).
    20. Caliendo, Marco & Cobb-Clark, Deborah A. & Obst, Cosima & Uhlendorff, Arne, 2023. "Risk preferences and training investments," Journal of Economic Behavior & Organization, Elsevier, vol. 205(C), pages 668-686.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:chinae:v:34:y:2026:i:2:p:32-66. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/iwepacn.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.