Estimation of China's labor demand elasticity

LI Juan1 WU Jianli1

(1.International Business School, Southwestern University of Finance and Economics, Chengdu Sichuan, China 611130)

【Abstract】Labor demand elasticity, which reflects the sensitivity of firm's labor demand relative to wage rate, can be used as an indicator to measure the fluctuation of labor market as well as the volatility of labors' income. This paper applies large micro firm-level database to estimate China's labor demand elasticity and furthermore gives necessary robustness checks, which is the first literature in this field to our best knowledge. In this paper, we conclude that: the labor demand elasticity of China's industrial firms is in the reasonable range (between −0.75 and −0.15 according to the previous literature); in the period of 1998–2009, the overall degree of labor market fluctuation in China appears slow fluctuation which indicates that China's labor market conditions and stability tend to be well improved. This empirical result, to a large extent, is due to labor demand elasticity of the large share of domestic firms in the whole China's economy tends to be smaller during this period of 1998–2009, while exported-oriented firms' labor demand is more elastic due to substitutability effect and scale effect. Therefore, workers employed by these exported-oriented units are more likely to bear fluctuation risks.

【Keywords】 labor demand elasticity; employment fluctuation; micro firms data; ownership;


【Funds】 National Natural Science Foundation for Young Scholar of China (Grant No. 71403216): "Employment protection legislation and labor market effect under trade openness conditions: a study based on dual heterogeneity of enterprises and individuals" Sichuan Key Project in Philosophy and Social Science (Grant No. SC14A004): "Developing inland open economy in Sichuan" Southwestern University of Finance and Economics Project of "Special Fund for Basic Scientific Research in Centrally-affiliated Universities" (Grant No. JBK150205): "Employment protection legislation and MNCs’ direct investment location decision under the view of legal economics: based on global macro and micro evidence" Sichuan Universities Scientific Research Innovation Group (Grant No. JBK130504): "Free trade zone strategy and renminbi zone"

Download this article


    [1] Sheng, B. & Niu, R. The Journal of World Economy (世界经济), 6 (3): 3-15 (2009).

    [2] Slaughter M J. International Trade and Labor-Demand Elasticities. Journal of International Economics, 2001, 54 (1): 27-56.

    [3] Krishna P, Mitra D, Chinoy S. Trade Liberalization and Labor Demand Elasticities: Evidence from Turkey. Journal of International Economics, 2001, 55 (2): 391-409.

    [4] Fajnzylber P, Maloney F W. Labor Demand and Trade Reform in Latin America. Journal of International Economics, 2005, 66 (2): 423-446.

    [5] Haouas I, Yagoubi M. Trade Liberalization and Labor Demand Elasticities: Empirical Evidence from Tunisia. Applied Economics Letters, 2008, 15 (4): 277-286.

    [6] Bergin R P, Feenstra C R, Hanson H G. Offshoring and Volatility: Evidence from Mexico’s Maquiladora Industry. American Economic Review, 2009, 99 (4): 1664-1671.

    [7] Li, J. Economic Perspectives (经济学动态), (3): 153-162 (2012).

    [8] Zhou, S. The Journal of World Economy (世界经济), (2): 31-40 (2006).

    [9] Zhou, S., Li, C. & Xie, J. Nankai Economic Studies (南开经济研究), (3): 107-123 (2007).

    [10] Zhou, S., Yi, M. & Wang, Y. Economic Survey (经济经纬), (1): 38-41 (2010).

    [11] Hicks J R. The Theory of Wages. London: Macmillan, 1963: 143.

    [12] Hamermesh D S. Labor Demand. New Jersey: Princeton University Press, 1986: 61-136.

    [13] Naseem A, Amanat A. Does Trade Liberalization Increase the Labor Demand Elasticities? Evidence from Pakistan. MPRA Paper, 2007.

    [14] Amiti M, Konings J. Trade Liberalization, Intermediate Inputs, and Productivity: Evidence from Indonesia. The American Economic Review, 2007, 97 (5): 1611-1638.

    [15] Levinsohn J, Petrin A, Poi B. Production Function Estimation in STATA Using Inputs to Control for Unobservables. Stata Journal, 2004, (4): 113-123.

    [16] Li Z, Yu M. Exports, Productivity, and Credit Constraints: A Firm-level Empirical Investigation of China. SSRNWorking Paper, 2009.

    [17] Cai H, Liu Q. Competition and Corporate Tax Avoidance: Evidence from Chinese Industrial Firms. The Economic Journal, 2009, 119 (537): 764-795.

    [18] Hausman J A. Specification Tests in Econometrics. Econometrica, 1978, 46 (6): 1251-1271.

    [19] White H. A Heteroscedasticity-consistent Covariance Matrix Estimator and a Direct Test for Heteroscedasticity. Econometrica, 1980, 48 (4): 817-838.

    [20] Lu, M. & Chen, Z. Economic Studies (经济研究), (11): 42-47 (1998).

    [21] Scheve K E, Slaughter M J. Economic Insecurity and the Globalization of Production. American Journal of Political Science, 2004, 48 (4): 662-674.

    [22] Hakkala K, Heyman F, Sjöholm F. Multinationals, Skills, and Wage Elasticities. Review of World Economics, 2010, 146 (2): 263-280.

    [23] Card D, Lemieux T, Riddell W C. Unions and Wage Inequality. Journal of Labor Research, 2004, 25 (4): 519-559.

    [24] Freeman R B, Medoff J L. What Do Unions Do? Industrial and Labor Relations Review, 1984, 38: 244.

    [25] Bennett J T, Kaufman B E. What Do Unions Do? A Twenty-year Perspective. New Jersey: Transaction Publishers, 2011: 102.

    [26] Mitra D, Shin J. Import Protection, Exports and Labor-demand Elasticities: Evidence from Korea. International Review of Economics & Finance, 2012, 23 (1): 91-109.

This Article


CN: 22-1017/C

Vol 37, No. 06, Pages 93-102

November 2015


Article Outline


  • 1 Introduction
  • 2 Modelling, variable design and data processing
  • 3 Empirical result and analysis
  • 4 Conclusion and policy implications
  • References