The Effect of Labor Protection on Firms’ Operational Efficiency: Evidence from China’s Labor Contract Law Implementation

Abstract

We explored the effect of labor protection on firms’ operational efficiency, based on empirical data from China. Taking China’s Labor Contract Law implementation in 2008 as a quasi-natural experiment, we constructed a difference-in-differences (DID) model to investigate the relationship between labor protection and firms’ operational efficiency. Based on a sample of Chinese listed companies in the non-financial sector from 2004–2021, the analysis results show that labor protection can significantly improve a firm’s operational efficiency. In addition, we found that the positive effect is more significant among state-owned enterprises and in regions with a higher legal governance degree. This study enriches the research that explores the effects of labor protection on firms’ performance by providing more empirical evidence from China, and reveals that labor protection can positively affect a firm’s operational performance in the long term.