Government Intervention and Labor Investment Efficiency: Evidence from China’s Industrial Policy

ABSTRACT

This study examines whether government intervention via industrial policy affects labor investment efficiency. Covering two of China’s Five-Year Plans spanning 2006–2015, we find that indirect government intervention via industrial policy results in lower employee numbers and higher labor investment efficiency. The effect is stronger in state-owned enterprises (SOEs), especially in SOEs controlled by local government, and in regions with weaker market-based institutions. The effect operates through reducing over-hiring, but not reducing under-hiring, under-firing, or over-firing. Overall, our results indicate that indirect government intervention via industrial policy improves labor investment efficiency by alleviating local Chinese governments’ intervention on firms.

KEYWORDS:

• Industrial policy
• labor investment efficiency
• government intervention

JEL:

• G18
• J24
• L52

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Supplementary Material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/1540496X.2022.2147782.

Notes

1. We adopt alphabet plus two-digit codes for manufacturing firms and alphabet codes for other firms.

Additional information

Funding

Wenfei Li appreciates the financial support of the National Natural Science Foundation of China (No. 71702038) and the Humanities and Social Sciences Foundation of Ministry of Education of China (No. 21YJC630055). Cen Wu appreciates the financial support of the National Natural Science Foundation of China (No. 71802095) and China Postdoctoral Science Foundation (No. 2019T120796; No. 2018M640888)