The labor leverage discount effect in China: An explanation from labor-technology substitution

Abstract

Under the dual background of transformation and upgrading of Chinese economy and the new round of technological revolution, we select the quarterly data of Shanghai and Shenzhen A shares from 2011 to 2019 to investigate whether there is a substitution effect between labor factor and technology factor based on the micro perspective, and then provide an explanation for the labor leverage discount in China. We find that: 1) There is a significant substitution effect between the firm's labor factor and technology factor, and the degree of substitution is more obvious in the high-tech industry, state-owned firms and firms with low financing constraints; 2) The performance of this effect is different in different economic conditions: The substitution effect is stronger during the economic downturn, which indicates that the best time for firm to make technology substitution decision is economic recession; 3) Labor-technology substitution can significantly weaken the negative effect of labor leverage on stock returns. This result is still robust after replacing the labor technology-substitution variable with total factor productivity and labor productivity, which can also directly reflect the the firm's technical level. The result prove that the firm's technical level has a significant inhibitory effect on labor leverage discount, indicating that labor factor can effectively promote the positive effect of low-level labor leverage on stock returns. Related results can provide ideas for firms to take effective measures to cope with the rising labor costs and the shortage of labor supply caused by the aging population. At the same time, those results also provide empirical support for the in-depth understanding of the pricing mechanism of labor leverage in Chinese A-share market, the rational allocation of production factor, the transformation of the firm's growth mode and the optimization and upgrading of the firm's production structure.