The labor demand effects of lending rate liberalization: Evidence from a quasi-natural experiment of removing the floor for lending rates

While lending rate liberalization improves credit allocation efficiency, does it also help firms ease financing constraints and boost labor demand? In 2013, China took a decisive step toward market-oriented financial reform, as the lower bound on bank lending rates was abolished. Using data for firms listed on the Shanghai and Shenzhen stock exchanges from 2009 to 2019, this paper employs a difference-in-differences (DID) approach to examine how lending rate liberalization affected firms’ employment scale and composition. The results show that the reform expanded access to bank credit for non-state-owned listed firms. Relative to their state-owned counterparts, non-state-owned enterprises (non-SOEs) experienced a 6.42% larger increase in labor demand following the reform, and they significantly expanded their hiring of low-skilled workers. Further analysis shows that the employment effect is concentrated among financially constrained non-SOEs, and the reform simultaneously increases firm-level investment, validating the credit-to-employment transmission chain, and the simultaneous rise in both managerial and worker wages rules out a cost-saving substitution motive. These effects are concentrated in the manufacturing sector. The findings shed light on the linkages between financial and labor markets and offer implications for the coordination of monetary and employment policies.