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Labor costs and domestic value added: Evidence based on the China’s new Labor Contract law

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  • Kong, Dongmin
  • Jin, Yifan
  • Liu, Shasha

Abstract

This paper investigates the impact of labor costs on the domestic value added (DVA) at the firm-level. To establish causality, we use the quasi-natural experiment of the implementation of China’s new Labor Contract law, which leads to a sudden increase in labor costs, to conduct a difference-in-differences (DID) estimation. We find that an increase in labor costs significantly and persistently increases firms’ DVA. Mechanism analyses suggest that these effects are mainly driven by improvement of management efficiency, changes in firms’ trading patterns (from processing trades to ordinary trades), progress in process innovation, and further increased product market power. Moreover, our results are stronger for upstream firms far from final consumption, firms with low product quality, non-state-owned firms, and firms located in areas with low market competition or less legal environmental protection. Overall, this paper investigates a determinant of DVA and adds evidence to the economic implications of China’s new Labor Contract law.

Suggested Citation

  • Kong, Dongmin & Jin, Yifan & Liu, Shasha, 2025. "Labor costs and domestic value added: Evidence based on the China’s new Labor Contract law," Labour Economics, Elsevier, vol. 97(C).
    • Handle: RePEc:eee:labeco:v:97:y:2025:i:c:s0927537125001435
    DOI: 10.1016/j.labeco.2025.102819
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    Keywords

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    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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