Did the Labor Contract Law Affect the Capital Deepening and Efficiency of Chinese Private Firms?

• Published date: 01 September 2021
• Author: Jian Ding,Yixiao Zhou
• Date: 01 September 2021
• DOI: http://doi.org/10.1111/cwe.12388

©2021 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 105–126, Vol. 29, No. 5, 2021 105

*Jian Ding, Director of the Project Department, Shenzhen Particle Research Institute, China. Email: jian.ding@

alumni.anu.edu.au; Yixiao Zhou, Senior Lecturer, Crawford School of Public Policy, Australian National

University, Australia. Email: yixiao.zhou@anu.edu.au.

Did the Labor Contract Law Affect the

Capital Deepening and Effi ciency of

Chinese Private Firms?

Jian Ding, Yixiao Zhou*

Abstract

Since the implementation of the Labor Contract Law (LCL) in 2010, a significant

increase in the capital/labor ratio, known as capital deepening, has occurred in private

firms in China. However, the cause and impact of the capital deepening is still in

question, as either technological change or a higher cost of labor might cause it. Using

data from the Chinese Private Enterprise Survey in 2008 and 2012, two critical fi ndings

are reported in this study. First, pension coverage signifi cantly affected the capital/labor

ratio in private fi rms after 2010. Second, large private fi rms are able to generate higher

total factor productivity after the implementation of the LCL because they can adjust

their production function more easily than smaller competitors. These findings have

policy implications for reforms in the Chinese labor market.

Key words: capital deepening, effi ciency evaluation, employment protection legislation,

labor market intervention, mandated benefi t

JEL codes: E26, J08, J41, K12

I. Introduction

At the end of 2007, the National People’s Congress of China passed a national Labor

Contract Law (LCL) to regulate the labor market. The LCL is essentially a form

of employment protection legislation (EPL), and it introduced compulsory written

labor contracts, reinforced the minimum wage standard and mandated benefi ts, and

promoted the infl uence of trade unions. The LCL came into force on 1 January 2008.

However, the LCL,along with other labor laws, such as social insurance legislation,

was temporarily suspended due to the global financial crisis. This suspension was

ceased by the end of 2009. Thus, 2010 was the real starting date for the enforcement

Jian Ding, Yixiao Zhou / 105–126, Vol. 29, No. 5, 2021

©2021 Institute of World Economics and Politics, Chinese Academy of Social Sciences

106

of the law. There was a sharp surge in demand for industrial robots from China after

2010 (IFR International Federation of Robotics, 2019). This naturally increased the

capital/labor ratio in Chinese fi rms. Empirical studies from other nations suggested

that capital deepening is often correlated with labor market interventions (Autor et al.,

2007; Hasan et al., 2013; Cette et al., 2016; Cingano et al., 2016). Another popular

explanation of capital deepening is that it is due to technological improvement, which

often tends to be capital augmenting (Bentolila and Saint-Paul, 2003; Arpaia et al.,

2009; Raurich et al., 2012). This view, however, cannot explain the slowdown in

overall productivity, measured as total factor productivity (TFP), which has occurred

in China since 2010 (Li and Wang, 2015). The cause of capital deepening in China

remains unsolved: is it a natural consequence of technological improvement, or a

result of policy intervention?

Coincidentally, although national productivity declined after 2010, it is reported

that China’s large private fi rms performed exceptionally well after the intervention by

the government. Figure 1 shows that the number of large fi rms in China has increased

threefold since 2011. Figure 2 presents the financial reports of stock-market-listed

firms, such as Haier, Sany, Midea, and Gree. It shows that the sales value of these

firms increased by two to three times in 2010. The divergent performance of large

firms in China after implementation of the LCL is a phenomenon that needs further

investigation.

Figure 1. Change in the number of large fi rms in China, 2003–2016

Source: Authors’ construction using data from the National Bureau of Statistics of China, available from:

https://data.stats.gov.cn/easyquery.htm?cn=C01.