Payroll tax shields and wage stickiness:evidence from China’s 2008 corporate income tax law

ABSTRACT Labor-cost adjustment has become an increasingly significant factor in enterprise development and economic growth, yet labor costs have proved ‘sticky’: more likely to rise with increasing revenue than fall when revenues decline. Although tax policies play an important role in wage determination, there is little research on how they affect wage stickiness. We treat China’s tax-reforming 2008 Corporate Income Tax Law as a shock and find that increases in nominal tax rates enhance wage stickiness in relation to ordinary employees but not executive compensation. The effect is most pronounced in enterprises with higher long-term debt ratios, state-owned enterprises, and labor-intensive industries.