Impact of Labor Protection Laws on the Operating and Financial Risks of Firms: The Case of China
Date of Award
Economics and Finance
Dr. Tarun Mukherjee
Dr. Sudha Krishnaswami
Dr. Wei Wang
Dr. Duygu Zirek
A debate exists regarding the effect of labor protection laws on labor costs. Whether labor protection laws increase or decrease labor costs has implications for risk exposure of affected firms. If the labor costs go up, all else the same, the firm’s breakeven point goes up. Facing increased business risk, the firm must resort to strategies that inhibit the risk exposure, especially if the higher labor costs cannot be transferred, without adverse consequences, to consumers. The strategies include reigning in, if at all possible, operating leverage and financial leverage. Conversely, if the labor costs decrease, a firm’s business risk declines, and the firm has options to increase its operating leverage and/or financial leverage, lower the product price, or do nothing. By examining the Chinese firms’ reactions to the 2007 labor protection laws, we draw conclusions about laws’ directional impact on labor costs. We find that Chinese firms attempt to reduce business risk by lessening labor intensity, and labor-intensive firms are able to reduce the labor intensity at a significantly higher rate than capital-intensive firms. Neither group is able to significantly reduce asset tangibility. We also find that all firms significantly reduce their financial leverages. Consequently, firms’ investments, as measured by sales growth, decline in the post-reform period. These results are consistent with the cost of labor increasing as a result of the stricter labor protection laws.
HUANG, YUXIN, "Impact of Labor Protection Laws on the Operating and Financial Risks of Firms: The Case of China" (2018). University of New Orleans Theses and Dissertations. 2546.
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