Does economic policy uncertainty matter in labour investment efficiency? Evidence from China

PurposeThis study aims to examine the effect of economic policy uncertainty (EPU) on Chinese firms’ labour investment inefficiency (ABLIE).Design/methodology/approachThe authors run regressions to text out hypothesis with several endogeneity and robustness checks.FindingsThe authors find a significant positive relationship between China EPU and a firm’s ABLIE, supporting the managerial entrenchment theory that suboptimal labour investment occurs when the economy is uncertain due to agency problems. Furthermore, the mechanism of the result is through a firm’s underinvestment in labour. The mitigating effect suggests that state-owned enterprises and firms with political connections may suffer less labour investment inefficiency when EPU is high. Next, the results of firms’ heterogeneities show that the impact of EPU on a firm’s ABLIE is only significant for firms with more financial constraints and weaker corporate governance. The authors also find that labour law protection can significantly reduce the negative effect of EPU on labour investment efficiency. Finally, the result remains significant after alleviating the endogeneity concerns and robustness tests.Originality/valueThe authors enrich the literature on labour investment efficiency. Most of the existing literature on labour investment efficiency focuses on the impact of micro-economic factors on labour investment efficiency. New evidence to support the conservative labour investment. The study enriches the literature in EPU.