Effectiveness of China’s Labor Contract Law*
- Evidence from China Employer-Employee Survey
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
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