The power of the business group: Differences in firm hiring decisions under labor protection shock

Labor protection shocks significantly influence firms' employment decisions. Previous studies have highlighted varying labor employment behaviors in response to such shocks, but they have not focused on the distinctions between group-affiliated and unaffiliated firms. Using the Labor Contract Law (LCL) in China as an exogenous labor protection shock, we constructed a unique firm-group level database to investigate the differences in employment responses between these two types of firms. Our findings reveal that while the LCL reduced overall labor employment, its impact on group-affiliated firms was considerably less severe than on unaffiliated firms. This more measured adjustment in employment is mainly attributable to the reallocation of liquid assets among affiliated firms within business groups. By adopting such strategies, group-affiliated firms attained relatively better performance in total factor productivity and profitability compared to non-affiliated firms.