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Firm Response to an Employment Regulation: Evidence from a Natural Experiment in China

Ran Xu, Guanmin Liao, Pengfei Gao Orcid Logo

Finance and Economics PCR Conference, Renmin University of China, Beijing, China (2025)

Swansea University Author: Pengfei Gao Orcid Logo

Abstract

This paper examines the impact of labor dispatch regulation on firm productivity in China. Labor dispatch, a form of indirect employment widely used to reduce labor costs and increase flexibility, expanded rapidly following the 2008 Labor Contract Law, often resulting in unequal treatment of workers...

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Published in: Finance and Economics PCR Conference, Renmin University of China, Beijing, China (2025)
Published:
URI: https://cronfa.swan.ac.uk/Record/cronfa70720
Abstract: This paper examines the impact of labor dispatch regulation on firm productivity in China. Labor dispatch, a form of indirect employment widely used to reduce labor costs and increase flexibility, expanded rapidly following the 2008 Labor Contract Law, often resulting in unequal treatment of workers and a dual labor market. In response, the Chinese government implemented the 2014 Interim Provisions on Labor Dispatch (IPLD). Using a panel of Chinese A-share listed firms from 2008 to 2019 and applying a difference-in-differences design, we exploit variation in firms’ labor intensity to identify the effects of the regulation. The results show that restricting labor dispatch significantly increases total factor productivity (TFP). Mechanism analysis indicates that productivity gains are driven by workforce upgrading, capital-labor substitution, and increased innovation. Moreover, the regulation improves employee compensation, reduces pay inequality, and enhances firm-specific corporate social responsibility performance. Our findings provide novel evidence that well-designed labor regulations can simultaneously promote efficiency and equity, contributing to high-quality and inclusive economic growth in emerging economies.
College: Faculty of Humanities and Social Sciences

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