Abstract
This paper studies how labor supply affects corporate investment by exploiting an exogenous policy relaxation of urban household registration (hukou) in China. We find that following the staggered hukou policy change, low-skilled labor inflow leads to an increase in the capital expenditure of local firms, consistent with the complementarity hypothesis of low-skilled labor and physical capital. The results are stronger for firms that are less automated and more labor intensive and for regions with lower household income. Our findings suggest that labor mobility induced by labor market friction reduction stimulates corporate investments.
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