Guarantee employment or guarantee wage? Firm-level evidence from China

Abstract

This study investigates how firms respond to the economic shock and discusses policy implication that whether the government should prioritize guaranteeing employment or guaranteeing wage. Using a comprehensive dataset, our research reveals negative effects of lockdown policies on firms' performance. In response, firms opted to reduce employment rather than cut wages. This strategy remained consistent across various types of firms and different lockdown measures. However, reducing employment without cutting wage is superficial. In fact, firms internally reduced the employment of informal workers, so that to stabilize the wages of formal employees. This study sheds light on the phenomenon of increased unemployment and income inequality during the pandemic, and advocates for prioritizing vulnerable groups to ensure their employment.