Has China’s Labor Contract Law Curtailed Economic Growth?

As China reformed its economy during the past 44 years, it experienced the fastest sustained expansion by a major economy in history, with an annual rate of GDP growth averaging nearly 10% from 1978 to 2018. In the past decade, however, the rate of growth has noticeably slowed, falling to just under 7% on the eve of the COVID-19 pandemic in 2018. Though GDP growth over 6% might be considered admirable in many nations, in China it has sparked a debate about the causes of the slowdown. One suspect is China’s 2008 Labor Contract Law (LCL), which provides workers with certain rights against firings and other adverse employment actions. Critics of the law claim its provisions threaten to stifle the Chinese economy by unduly restricting employers’ ability to terminate unproductive workers and adjust their workforce to changing economic conditions. In the past, the Chinese government strongly supported the LCL. The issue for the present is whether that support should continue. This article provides the first detailed comparative study of the LCL and reveals that Chinese law imposes constraints no more restrictive than the average among OECD countries. The article also challenges the contention that provisions of the LCL have caused slower growth and adversely affected Chinese labor markets. Theoretical models generate only ambiguous and inconsistent predictions concerning the effects of employment protections on labor market performance. And the available empirical evidence likewise fails to show any consistent pattern of adverse effects associated with employment protection laws. We argue that this economic literature casts considerable doubt on the causal claim that Chinese labor law has reduced the country’s growth rate or depressed employment. Limited coverage and under-enforcement further diminish the likelihood that China’s labor regulations have harmed the economy. Thus, the Chinese government should look skeptically on claims that reducing the employment protections in the LCL will reignite economic growth.