Anatomy of wage rigidity in China: Lessons from the global financial crisis for post-pandemic recovery

Abstract

This study examines the extent and cause of Chinese firms’ labour cost adjustment during the 2008 global financial crisis (GFC). First, we confirm that some typical features of downward nominal wage rigidity during the recession period coincide with the implementation of the Labour Contract Law, covering wages and social security payments. Second, we find that firms with higher shares of casual workers could lower their labour cost more effectively. The overall results demonstrate that the Quantitative Easing programme was necessary for counteracting the economic downturn during the GFC. Therefore, the length of this on-going crisis would be affected by wage rigidity in the economy. This study has implications for addressing the economic downturn in China following the COVID-19 pandemic, which is characterised by a high level of unemployment.