The Effects of Labour Laws on Productivity, Employment, Unemployment and the Labour Share of National Income: Analysis of New Evidence from the Cambridge Leximetric Database, with a UK-China Comparison

We report the results of an econometric analysis of the effects of labour laws in the UK and China. For data on labour laws we draw on the 2023 update of the CBR-LRI index, part of the Cambridge Leximetric Database, which codes for labour laws around the world between 1970 and 2022. The longitudinal coverage of the CBR-LRI enables us to use time-series techniques which model dynamic changes in an economy over time. We employ impulse response function analysis to estimate the effects of labour laws on indicators of efficiency (productivity, employment and unemployment) and distribution (labour’s share of national income). We find that stronger labour laws in the UK are associated with rising employment and falling unemployment, while those in China are associated with rising productivity. We also observe positive impacts of labour laws on the labour share in both countries. Breaking down our results according to particular types of labour law, the positive employment effect we see in the UK is associated with stronger working time protections, while the positive productivity effect in China is associated with more protective laws regulating flexible forms of employment and with stronger dismissal laws. Assessing our results, we suggest that they speak to the importance of labour laws for avoiding regression, in the British case, to a low-cost, low productivity economy, and, in China’s case, for helping bridge the ‘middle income gap’ to sustainable development. More generally, our findings imply the need for adjustment to standard models of the role of labour laws in the economy and to the policy advice which they generate, to the following effect: labour laws, by disciplining capital, contribute to its more productive use.