Seeking gains but incurring losses: A study on the employment effect of zombie firms in China

Abstract

The behavior of local governments continuously "infusing blood" into zombie firms to "stabilize employment" may lead to "unintended consequences". This paper empirically examines the impact of zombie firms on employment and its mechanism of action at the regional level in China. The research findings show that the deepening of the degree of zombification significantly suppresses the growth rate of local enterprise labor employment. The results of a series of robustness tests based on the instrumental variable method have strengthened this conclusion. The results of the mechanism analysis indicate that zombie firms intensify the financing constraints and tax burdens of normal firms, reduce their working capital, internal cash flow, investment scale, and output level, and then impede their job creation, which is not conducive to the net employment growth of normal firms. The heterogeneity analysis reveals that the employment suppression effect of zombie firms is more prominent in regions with a higher degree of government intervention, in central and western provinces, as well as in small and medium-sized enterprises and non-export enterprises. The study also finds that zombie firms have a significant inhibitory impact on the wages of employees and the share of labor income in normal firms. This research confirms that local governments' bailout of zombie firms comes at the expense of the employment interests of other firms. Instead of stabilizing employment, it will undermine the long-term stability and continuous growth of employment. While providing new literature and empirical evidence for the labor market effects of zombie firms, this paper also offers important decision-making references for continuously stabilizing and expanding employment from the perspective of zombie firms.