Labour adjustment by employee type when sales change

Abstract

We examine how companies in China manage labour resources through sales upturns and downturns. We argue that managers make implicit commitments to retain some employees through downturns based on the nature of activities the employees engage in. We predict higher commitment in contracting (more stickiness) for employees who accumulate intangible asset value and engage in other long horizon activities. We associate employees with three primary business activities: sales and marketing (S&M), accounting and financial management (A&F) and production and operations (P&O). Employees in S&M acquire product knowledge and build relations with customers that benefit the firm over time. Employees in A&F combine professional skills with knowledge of the firm to support current operations and plan for future demand. Employees in P&O apply general and firm-specific skills to service current production and sales. We discriminate between state-owned enterprises (SOEs) and non-SOEs in our analysis. For SOEs, there is stickiness in labour adjustment across all activities, consistent with political employment objectives of SOEs. For non-SOEs, firms add more employees for S&M and A&F when sales increase than they remove when sales decrease but adjustments to labour for P&O activities are symmetric with respect to increases and decreases in sales.