The Impact of China's Millennium Labor Restructuring Program on Firm Performance and Employee Earnings

Abstract

Around the turn of the century, China experienced perhaps the largest labor restructuring program in the world. This paper uses a new data set of Chinese industrial enterprises to examine what leads to downsizing, and tries to understand the effects of labor downsizing on firms' technical efficiency, financial performance, and employee wages. We find that downsizing is more prevalent in SOEs, and is more likely when enterprises are older, larger, and have higher excess capacity. For both SOEs and private firms, downsizing is more likely when the prices of their products drop, but private firms respond more dramatically. Moreover, downsizing has serious short-term costs in terms of total factor productivity. For mild downsizing, private firms suffer more deterioration in productivity. The distribution of surplus after downsizing is more favorable to labor in SOEs. For severe downsizing, SOEs and private firms both exhibit lower TFP growth with similar magnitudes. Our findings imply that private firms emphasize profit goals while SOEs place a greater weight on labor protection.