Ef­fec­tive­ness of China’s La­bor Con­tract Law*

- Ev­i­dence from China Em­ployer-Em­ployee Sur­vey

China Economist - - Articles -

Qu Xiaobo (屈小博)

In­sti­tute of Pop­u­la­tion and La­bor Eco­nom­ics, Chi­nese Academy of So­cial Sciences (IPLE-CASS); Re­search Cen­ter for La­bor Re­sources of CASS

Ab­stract: Us­ing mi­cro-level data from China Em­ployer-Em­ployee Sur­vey (CEES), this pa­per con­ducts an em­pir­i­cal anal­y­sis of firms’ het­ero­ge­neous char­ac­ter­is­tics in the im­ple­men­ta­tion of the La­bor Con­tract Law and its ef­fects on em­ploy­ees. Our find­ings are as fol­lows: With China’s eco­nomic de­vel­op­ment, firms more proac­tively im­ple­ment the La­bor Con­tract Law, re­sult­ing in a higher per­cent­age of em­ploy­ees with la­bor con­tracts. La­bor con­tracts sig­nif­i­cantly in­crease the prob­a­bil­ity of em­ploy­ees in re­ceiv­ing so­cial in­sur­ances, such as pen­sion, health, un­em­ploy­ment, work in­jury and birth in­sur­ances, and have a sig­nif­i­cantly pos­i­tive ef­fect on wage in­come. Longer term of la­bor con­tract cor­re­sponds to stronger em­ploy­ment pro­tec­tion, and such an ef­fect is highly ro­bust. Larger firms with higher cap­i­tal-la­bor ra­tios have bet­ter re­sults in im­ple­ment­ing the La­bor Con­tract Law. And em­ploy­ees of pri­vate and la­bor-in­ten­sive firms have poorer cov­er­age of em­ploy­ment and so­cial pro­tec­tion; such firms should be given fo­cal at­ten­tion in the law’s im­ple­men­ta­tion.

Key­words: La­bor Con­tract Law, cor­po­rate het­ero­gene­ity, em­ployee het­ero­gene­ity, im­ple­men­ta­tion ef­fect, mech­a­nism of in­flu­ence

JEL Clas­si­fi­ca­tion Codes: J01; J08; J50

DOI: 1 0.19602/j .chi­nae­conomist.2018.09.08

1. In­tro­duc­tion

There has been a great deal of aca­demic in­ter­ests and con­tro­ver­sies re­gard­ing the in­flu­ence of the La­bor Con­tract Law on China’s la­bor mar­ket and job cre­ation in the cor­po­rate sec­tor (Ace­moglu et al., 2005). Some stud­ies sug­gest that the La­bor Con­tract Law and min­i­mum wage sys­tem help in­crease em­ployee pro­tec­tion and re­duce poverty (Au­tor et al., 2007; Alaniz et al., 2011). How­ever, many em­pir­i­cal stud­ies sug­gest that such la­bor reg­u­la­tions failed to pro­tect low-in­come peo­ple; in­stead, in­flex­i­ble and in­ef­fi­cient la­bor mar­ket led to fewer jobs and more in­come in­equal­i­ties and poverty (Ace­moglu & An­grist, 2001; Neu­mark et al., 2006; Long & Yang, 2016). Ef­fec­tive­ness of la­bor con­tracts and reg­u­la­tions is di­min­ished or off­set by em­ploy­ers’ var­i­ous coun­ter­mea­sures (Wang & Gun­der­son, 2015), such as down­siz­ing the work­force, adopt­ing flex­i­ble em­ploy­ment, in­creas­ing work­ing hours and re­duc­ing unit la­bor cost. The gov­ern­ment sets dif­fer­ent goals across var­i­ous stages, which de­ter­mines the in­ten­sity and pri­or­ity of la­bor reg­u­la­tions and poli­cies. In ad­di­tion, the pol­i­cy­mak­ing process also takes into ac­count firms’ re­ac­tions to la­bor reg­u­la­tions. Opin­ions dif­fer re­gard­ing the ef­fects of la­bor reg­u­la­tions and poli­cies.

Amid its rapid eco­nomic growth and job cre­ation, China in­creased la­bor reg­u­la­tion and cre­ated a ba­sic safety net (Cai, 2010), in­clud­ing the La­bor Con­tract Law and So­cial In­sur­ance Law. In re­sponse to chang­ing la­bor sup­ply and de­mand, China en­hanced la­bor pro­tec­tion and job se­cu­rity, as ev­i­denced in the en­act­ment of the new La­bor Con­tract Law in the depth of the global fi­nan­cial cri­sis in 2008 and its amend­ment in 2012. Aside from reg­u­la­tory in­ter­pre­ta­tions and an­a­lyt­i­cal com­men­taries, stan­dard em­pir­i­cal stud­ies on China’s La­bor Con­tract Law were car­ried out from the fol­low­ing per­spec­tives:

First, em­pir­i­cal stud­ies from a de­mand per­spec­tive use cor­po­rate data to ad­dress the fol­low­ing ques­tions: (1) Whether cor­po­rate la­bor cost in­creases as a re­sult of the La­bor Con­tract Law. A key dis­pute is whether so­cial in­sur­ance con­tri­bu­tion ra­tio in­creased af­ter the law’s im­ple­men­ta­tion in 2008 as a re­sult of an in­sti­tu­tional cost in­crease or as a di­rect ef­fect of the law it­self (Shen et al., 2017); (2) whether the law af­fects la­bor-in­ten­sive firms’ per­for­mance and fac­tor in­put (Pan & Chen, 2017; Ni & Zhu, 2016; Liao & Chen, 2014; et al.); (3) to what ex­tent the La­bor Con­tract Law in­flu­ences la­bor de­mand and em­ploy­ment (Zhang et al., 2017; Chen & Funke (2001)).

Sec­ond, em­pir­i­cal stud­ies from a work­force per­spec­tive us­ing la­bor mar­ket sur­vey data. This type of stud­ies un­cover the de­ter­mi­nants of la­bor con­tract sign­ing rate, sat­is­fac­tion with the La­bor Con­tract Law, in­tent of res­ig­na­tion and em­ployee so­cial pro­tec­tion in re­la­tion to la­bor con­tract (Wei & Xiao, 2013; Liu, 2016; Li & Richard Free­man, 2014; Gao et al., 2013; Gal­lagher et al., 2015). To some ex­tent, these stud­ies re­veal the ef­fects of China’s La­bor Con­tract Law of 2008.

How­ever, em­pir­i­cal stud­ies us­ing cor­po­rate data can­not re­veal the het­ero­ge­neous char­ac­ter­is­tics of in­di­vid­ual em­ploy­ees, and listed com­pa­nies or pri­vate firms have fairly strong sam­ple se­lec­tiv­ity in terms of com­pany size and la­bor reg­u­la­tion. For those stud­ies us­ing la­bor sur­vey data, in­di­vid­ual la­bor con­tracts can­not re­flect firms or em­ploy­ers’ het­ero­ge­neous char­ac­ter­is­tics. In this pa­per, we carry out an em­pir­i­cal study on the La­bor Con­tract Law’s im­ple­men­ta­tion at the mi­cro level from both as­pects of firms and em­ploy­ees. Our mar­ginal in­no­va­tions in­clude (1) an in-depth rev­e­la­tion of the law’s im­ple­men­ta­tion and het­ero­ge­neous firm char­ac­ter­is­tics us­ing firms and em­ploy­ees’ matched data, i.e. match­ing la­bor con­tract sign­ing ra­tios with firm char­ac­ter­is­tics (such as firm size, own­er­ship and cap­i­tal-to-la­bor ra­tio) 1; (2) a more de­tailed struc­tural anal­y­sis on the types and terms of la­bor con­tract in re­la­tion to em­ploy­ees’ in­di­vid­ual char­ac­ter­is­tics to ob­serve the law’s ef­fects on em­ploy­ment and so­cial pro­tec­tion.

2. Data Source, Ex­pla­na­tions and De­scrip­tive Sta­tis­ti­cal Anal­y­sis

This study em­ploys mi­cro-level data of China Em­ployer-Em­ployee Sur­vey (CEES), one of its kind suc­cess­fully con­ducted for the first time in the coun­try. CEES study was jointly ini­ti­ated by Hong Kong Univer­sity of Sci­ence and Tech­nol­ogy (HKUST), Wuhan Univer­sity, the Chi­nese Academy of So­cial Sciences (CASS), and Stan­ford Univer­sity. The 2015 sur­vey in­ves­ti­gated 4,794 em­ploy­ees and 570 firms in 19 coun­ties and 13 cities in Guang­dong Province2. The 2016 sur­vey covered 8,939 em­ploy­ees and 1,121 firms in 39 coun­ties and 26 cities in Guang­dong and Hubei prov­inces, in­clud­ing 4,039 em­ploy­ees and 585 en­ter­prises in 20 coun­ties and 13 cities in Hubei Province3. In Guang­dong Prov­ince, fol­low- up sur­vey and sur­vey for ad­di­tional sam­ples were con­ducted at the same places. CEES sam­ples gen­er­ally in­clude all man­u­fac­tur­ing firms in Guang­dong and Hubei prov­inces in the third

eco­nomic cen­sus4, and are there­fore of broad rep­re­sen­ta­tive­ness.

CEES data re­quired by this study in­clude the num­ber and struc­ture of com­pany em­ploy­ees, wage level, la­bor re­la­tions, so­cial pro­tec­tion and trade union sta­tus; em­ployee sur­vey data in­cludes on­board­ing time, pro­mo­tion, la­bor con­tract, job po­si­tion, pro­fes­sional rank, skills, job tasks, over­time work, com­pen­sa­tion, bonus, and la­bor dis­putes. As men­tioned above, some em­pir­i­cal stud­ies are con­cerned with the La­bor Con­tract Law’s la­bor mar­ket im­pact from a sin­gle per­spec­tive of firms or em­ploy­ees. For in­stance, most stud­ies em­ployed data of listed com­pa­nies to dis­cuss the re­la­tion­ship be­tween la­bor pro­tec­tion and cor­po­rate per­for­mance. Stud­ies based on la­bor sur­vey data are con­cerned with the re­la­tion­ship be­tween the La­bor Con­tract Law and the em­ploy­ees’ choice of res­ig­na­tion or will­ing­ness to sign la­bor con­tracts. CEES data can be used to in­ves­ti­gate the law’s im­ple­men­ta­tion and firms and em­ploy­ees’ re­ac­tions, their het­ero­ge­neous char­ac­ter­is­tics, and the sign­ing of la­bor con­tracts.

2.1 Im­ple­men­ta­tion of the La­bor Con­tract Law

Sign­ing rate of la­bor con­tracts is a ba­sic cri­te­rion for eval­u­at­ing the im­ple­men­ta­tion of the La­bor Con­tract Law. Of CEES sam­ple firms, 80.92% signed la­bor con­tracts, which is higher than the re­sult of some stud­ies (see Fig­ure 1). For in­stance, Becker & Elf­strom (2010) con­sid­ers that con­tract sign­ing rate re­mained low af­ter 2008, with 60% of re­spon­dents hav­ing signed la­bor con­tracts. Us­ing CHIP 2007 and 2008 sur­vey data, Gao et al. (2013) ar­rived at the re­sult of 68%. A pos­si­ble rea­son is that most ex­ist­ing stud­ies were con­ducted around 2010, while CEES data re­flects the most re­cent sta­tus of 2015-2016. La­bor con­tract sign­ing rate in­creased with the law’s im­ple­men­ta­tion. An­other rea­son is that

in stud­ies based on house­hold sur­vey data, em­ploy­ees are from broader sec­tors, such as con­struc­tion, con­sumer ser­vices and house­hold ser­vices where la­bor con­tract sign­ing rates are low. CEES is a ran­dom sam­ple sur­vey on man­u­fac­tur­ing firms and em­ploy­ees in Guang­dong and Hubei prov­inces, which more ob­jec­tively re­flects the law’s im­ple­men­ta­tion there.

Fig­ure 1 shows the La­bor Con­tract Law’s im­ple­men­ta­tion among sam­ple man­u­fac­tur­ing firms. Firms more proac­tively im­ple­mented the Law and la­bor con­tract sign­ing rates in­creased with higher lev­els of eco­nomic de­vel­op­ment. In 2015 and 2016, sam­ple firms and panel firms in Guang­dong had higher la­bor con­tract sign­ing rates than the av­er­age of sam­ple firms in Hubei Prov­ince. Guang­dong Prov­ince also had one of the high­est in­flows of mi­grant work­ers. This ex­plains that the La­bor Con­tract Law was bet­ter im­ple­mented in Guang­dong Prov­ince than in Hubei Prov­ince. Eco­nomic de­vel­op­ment and mar­ket-based econ­omy prompted the gov­ern­ment and firms to put a greater premium on em­ploy­ees’ job se­cu­rity and so­cial pro­tec­tion.

As sug­gested by ex­ist­ing stud­ies, the La­bor Con­tract Law re­form has dif­fer­en­ti­ated ef­fects on var­i­ous re­gions, sec­tors and firms (Cui, et al., 2013). CEES sur­vey data show that with in­creas­ing firm size, a higher pro­por­tion of firms will sign fixed-term and in­def­i­nite la­bor con­tracts with their em­ploy­ees. Larger firm size also cor­re­sponds to a longer term of la­bor con­tracts (Ta­ble 1) 5.

Dif­fer­ent la­bor con­tract sign­ing rates across var­i­ous sec­tors are an im­por­tant re­flec­tion of the La­bor Con­tract Law’s im­ple­men­ta­tion. CEES data sug­gest that most man­u­fac­tur­ing sec­tors with above-

av­er­age la­bor con­tract sign­ing rates are cap­i­tal- and tech­nol­ogy-in­ten­sive sec­tors (such as com­puter, com­mu­ni­ca­tion and elec­tron­ics, ap­pa­ra­tus and in­stru­ment, rail­way, avi­a­tion and ship­build­ing, chem­i­cal and phar­ma­ceu­ti­cal man­u­fac­tur­ing), while tra­di­tional la­bor-in­ten­sive sec­tors like agri­cul­tural pro­cess­ing, tim­ber, leather, tex­tiles and ap­par­els and food pro­duc­tion have be­low-av­er­age la­bor con­tract sign­ing rates. This im­plies that de­tailed rules should be for­mu­lated in light of sec­tor char­ac­ter­is­tics to im­prove the La­bor Con­tract Law.

2.2 Em­ployee Char­ac­ter­is­tics

Fig­ure 2 shows the gen­der, age group, oc­cu­pa­tion, level of ed­u­ca­tion and la­bor con­tract sign­ing rates of em­ploy­ees in CEES data, which can be sum­ma­rized as fol­lows: First, male em­ploy­ees’ la­bor con­tract sign­ing rate is slightly higher com­pared with their fe­male coun­ter­parts, and there is an in­verted U-shaped dis­tri­bu­tion of la­bor con­tract sign­ing rate, i.e. con­tract sign­ing rate de­creases with the in­crease of age. Sec­ond, la­bor con­tract sign­ing rates vary greatly among em­ploy­ees of dif­fer­ent pro­fes­sional iden­ti­ties

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