Informatization and the mystery of employment absorption and decline in Chinese firms

SHAO Wenbo1,2 SHENG Dan3,4,5

(1.Post-doctoral Research Station of Applied Economics, Fudan University)
(2.Post-doctoral Research Station, Shanghai Pudong Development Bank 200002)
(3.Nankai Institute of International Economics, Nankai University)
(4.Center for Transnationals’ Studies, Nankai University)
(5.Center of Collaborative Innovation for the Construction of the Socialist Economy with Chinese Characteristics 300071)

【Abstract】The past 30 years have witnessed sustained rapid economic growth in China. However, with urbanization lagging behind industrialization, the labor income share has continued to decline in an even more pronounced way since the 1990 s. More surprisingly, media often report that big companies such as Haier, Sany Heavy Industries, Foxconn and Huawei are laying off employees with the expansion of output. In the wake of the financial crisis and the European debt crisis, it is natural to blame this on reduced external demand. However, further investigation reveals that the decline in employment demand for Chinese firms started well before the crises. Chinese industrial firm database data show that the average employment of firms has continued to decline at least since 1998, and more significantly in large companies, while the average business size has continued to expand. This is a puzzle that has nothing to do with the financial crises, as labor demand decreases with firm size. According to the related research on employment and wages, most of the attention has largely focused on labor income share, ignoring the facts of a sustained downward labor demand at the firm level, especially for large firms. We find that the rapid development of semiconductor technology lowered the price of information equipment, causing the wide application of information technology and equipment in production at the end of the 20th century. This informatization process brings about a profound change in the mode of production and results in changes in labor demand. To be specific, we develop a theoretical framework based on firm heterogeneity in information technology, and examine the impact of information and communication technology ( ICT) on labor demand and labor income share. The results show that firms’ information technology investment reduces their labor income share, but does not necessarily cut down their quantity of labor demand, which hinges critically on the degree of competition. Furthermore, we prove that the adoption of ICT worsens firms’ demand for labor if the degree of competition is sufficiently low. Otherwise, if the degree of competition is strong, then the adoption of ICT increases firms’ demand for labor. We empirically examine these arguments using a large sample dataset and find strong evidence in support of the theoretical hypothesis. This result has profound implications for “ensuring economic growth and employment” and promoting the integration of information technology applications with industrialization. Compared with the current research, this paper makes the following main contribution. First, it is the first study to put forward and examine the issue of declining employment in firms from the perspective of informationization. Second, it develops a theory and unbundles the impact of information technology on firm employment demand into two effects: the “substitution effect” and “scale effect.” Third, it deepens our understanding of the declining labor income share in China from the perspective of informationization. Fourth, instead of using aggregate data, this paper improves on the current research on labor income share by examining the issue based on a firm-level dataset. Fifth, this paper is the first to document the simultaneous reduction in labor income share and labor demand and examine two issues together in the same framework. It also shows that the impacts of ICT on labor demand and labor income share are different, as the latter is affected by not only labor demand but also wages. This paper makes three main suggestions. First, promoting employment has a crucial role in breaking the monopoly of industry, which may prevent a significant reduction in employment in the process of informationization. Second, it suggests that the labor income share decrease caused by firm resource allocation inequality may be partly offset by breaking the barriers of elements flow, which should promote income distribution more reasonably. Finally, it suggests that increasing labor education and training expenditures may increase employment and improve income distribution.

【Keywords】 information technology; labor income share; declining labor demands;

【Funds】 General Program of the National Nature Science Fund of China (71573141, 71673150) Program of China Postdoctoral Science Fund (2015M580274)

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    [1]. ① Continuous and consistent firm data are needed to analyze the changes in the average employment of firms. Considering the data quality problems in 2010 and the changes in statistical caliber after 2011 (during which “above designed size” is adjusted from CNY 5 million CNY to CNY 20 million, we mainly show the situation from 1998 to 2009 in the basic factual analysis.

    [2]. ① Informatization is a process in which technological changes center on information, and communication technologies affect economic and social production and lifestyle. There are many definitions and expressions of this concept. Lin and Dong (2003) made a relatively standard definition, that is, informatization referred to the process of transforming traditional economic and social structures with information technology based on the spread of information technology, industrial development and information technology in various sectors of society and economy.

    [3]. ② Information capital refers to the capital related to information technology and equipment, while the rest is traditional capital. Please refer to the detailed definition in the theoretical part for details.

    [4]. ① The derivation process from the theoretical model to the econometric model is subject to space limitations, but interested readers can obtain the content from the authors.

    [5]. ② The term market uses the degree of regional marketization to measure the degree of monopoly. Generally, the higher the degree of marketization is, the lower the degree of monopoly is. For easier cross-term analysis, we refer to Nunn (2007) and define Market as a large number minus the value of regional marketization index. Therefore, the larger the market is, the higher the degree of monopoly will be.

    [6]. ① The current data from China Industrial Enterprises Database are from 1999 to 2013, and there is no information data before 2004. Therefore, we select the data from 2004 to 2013.

    [7]. ② Information-related indicators are only available in 2004 data. Lagging regression is done for other years. Table 1 shows only the regression results of lagging 1 and 2 and the latest ninth period (i.e., 2005, 2006 and 2013). As the regression results of other lagging periods are similar, they are not listed due to space limitations.

    [8]. ① The theoretical part has proven that when the substitution elasticity of elements is greater than that of products, the scale effect will reduce the labor demand. It is not contradictory that the regression coefficients representing the scale are positive because the scale expansion in the theoretical analysis is completely determined by the informatization level of firms, and no other factors are considered. In fact, firm size is affected by many other factors, such as financing constraints and entrepreneurs’ future expectations. The explained variable used in this paper is directly based on the number of workers employed by the firm, which is obviously positively related to the production scale of the firm. If the number of labor is reduced by the initial firm size (e.g., total assets) to eliminate the influence of the firm size caused by factors other than informatization, the results at this time show that the regression coefficients of the term income are significantly negative. The results are not shown here. but interested readers can obtain them from the authors.

    [9]. ① In the regression of cross terms, due to collinearity, ICT terms are not added to the control variables, but the introduction of ICT will not affect our analysis results. Due to space limitations, all the regression results are not reported here. In addition, only the regression results of the lag phase are listed, and the regression results of other lag phases are similar, which are also not listed due to space limitation. Considering the possibility of collinearity in cross-term regression, we have also carried out further robustness tests by sub-sample regression and have not shown them.

    [10]. ① Due to space limitations, the regression results of this part are not listed in the text, but interested readers can obtain them from the authors.


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This Article


CN: 11-1809/S

Vol 42, No. 08, Pages 1215-1223

August 2016


Article Outline


  • 1 Introduction
  • 2 Literature review
  • 3 Theoretical model
  • 4 Measurement model and data descriptions
  • 5 Measurement results and robustness test
  • 6 Conclusions and policy recommendations
  • Footnote