Labor allocation in China: Implicit taxation of the heterogeneous non-state sector

Using China's Annual Survey of Industrial Production, we estimate the marginal revenue product of labor (MRPL) for all state-owned and above-scale non-state manufacturing firms for 2001-2004 and 2004-2007. We find that labor productivity varies systematically within industries by ownership type and that non-state firms face implicit labor taxation relative to state-owned enterprises (SOEs). We also find that, in keeping with ongoing reforms of the state sector, ownership differentials fall over time, with gaps between non-state enterprises and SOEs falling by about half over time. Within the non-state sector, enterprises registered as legal persons have higher MRPL, on average, than do firms registered as collective or private enterprises. Disaggregating this group using information on equity shares reveals that firms registered as legal persons and majority owned by legal persons have the highest MRPL relative to SOEs. Indeed, these enterprises show significantly higher MRPL than those firms directly controlled by the state. Legal-person firms with majority state ownership have MRPL differentials similar to those for legal-person firms with majority private or majority collective ownership. This evidence is consistent with continuing, albeit diminishing, implicit labor subsidies for directly SOEs but not for firms whose shares are owned by the state, even if those shares are registered to legal persons.