Rising labour cost, environmental regulation and manufacturing restructuring of Chinese cities

Abstract

By expanding the traditional shift-share analysis into a causal test, this paper decomposes the growth of the urban manufacturing industry into composition effect and competition effect to measure the rationalization and advancement of the manufacturing structure. After deriving an equilibrium model, we use the China's industrial enterprises data and the panel dataset of China's prefectural or higher-level cities to examine the effects of labour costs and environmental regulations on the manufacturing structure. The econometric results show that the rationalization of China's urban industry is much greater than the economic growth of the industry. The rapid growth of labour costs is not conducive to employment growth and competitiveness. The "innovation compensation" effect of environmental regulations is not enough to make up for the "follow the cost" effect. Labour costs and environmental regulations have synergistic effects on economic growth and manufacturing restructuring.