Cities’ labor administrative penalties and labor income share of enterprises

Abstract

The labor administrative penalties of a city are enforced by the city's labor security administrative department for any breaches of labor security laws, regulations, or norms. The severity of labor administrative penalties differs across cities; thus, this study aims to determine how a city’s penalties affect the labor income share of enterprises. We conduct a practical investigation to examine the influence of labor administrative penalties imposed by cities on the internal income distribution structure of firms. This study utilizes theoretical analysis and data on labor administrative penalties in Chinese cities, as well as samples of A-share listed businesses in Shanghai and Shenzhen. From the perspective of the internal income distribution structure, we examine the labor income share of firms and discover that labor administrative penalties in cities significantly raise the labor income share of these enterprises.The share of labor income of enterprises registered in the city increases by 0.9707% for each additional unit of cities’ labor administrative penalties (i.e., for a one-time labor administrative penalty per 10,000 people). The conclusion remains valid even after excluding the endogeneity and robustness tests. Regional labor administrative penalties can enhance the internal management of enterprise quality by promoting transparency and deterring non-compliance. This, in turn, mitigates credit risk for enterprises by fostering stable labor relations. Enhancing the quality of internal control and mitigating credit risk can lead to an increase in the labor income share of firms. An analysis of heterogeneity shows that the impact of labor administrative penalties in cities on increasing the percentage of labor income varies. The impact is more pronounced for state-owned firms and enterprises with low levels of investment.