The Regional Economics Applications Laboratory
Announces a Seminar by:

Zinan Zhang

China Economics and Management Academy
Central University of Finance and Economics, China

 "Wage Control Policy, Labor misallocation and the Structure transformation in China"




Davenport Hall


Abstract: The structure transformation, particularly the resources shifting from state-owned to private enterprises, is one of the most significant stylized facts during China’s economic development. Our paper studies the driving forces of the structure transformation comes from the wage control policy, which imposes a ceiling on total wage in China's state-owned firms. In our model economy, the private firms operate as stand neoclassic firms while state firms are subject to the requirement of the wage control policy given by government. Due to the constraint of the wage control policy, state firms cannot optimally choose labor demand and become inefficiency. The inefficiency state firms have to be dependent on the governments’ subsidies. As a result, the wage control policy results in a recession of labor and capital in the state firms. The calibration version of our model displays that the wage control policy accounts in itself for 7.9% and 5.11% of the reduction in state firms’ share of employment and output respectively, comparing to 42.72% and 31.16% in data. Two mechanisms explain this: (i) the increasing substitution between capital and labor decreases the labor demand for a given amount of capital stock; (ii) the drop in the return of investment decreases the capital level that the governments can survival.
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