Nber Working Paper Series Costly Labor Adjustment: Effects of China's Employment Regulations

This paper studies the employment and productivity implications of new labor regulations in China. These new restrictions are intended to protect workers' employment conditions by, among other things, increasing firing costs and increasing compensation. We estimate a model of costly labor adjustment from data prior to the policy. We use the estimated model to simulate the effects of the policy. We find that increases in severance payments lead to sizable job creation, a significant reduction in labor reallocation and an increase in the exit rate. A policy of credit market liberalization will reduce employment, slightly increase labor reallocation and reduce exit. The estimated elasticity of labor demand is about unity so that an increase in the base wage leads to sizable job losses. Russell Cooper Department of Economics European University Institute via della Piazzola, 43 Firenze, 50133 ITALY and NBER [email protected] Guan Gong School of Economics Shanghai University of Finance and Economics 777 Guoding RD, Shanghai CHINA [email protected] Ping Yan National School of Development China Center for Economic Research Peking University [email protected]