Do politically connected, economically powerful firms comply with labor laws in China?
| DOI | https://doi.org/10.1108/ER-07-2020-0360 |
| Published date | 19 January 2022 |
| Date | 19 January 2022 |
| Pages | 803-832 |
| Subject Matter | HR & organizational behaviour,Industrial/labour relations,Employment law |
| Author | Ying Chen,Yuanyuan Sun |
Do politically connected,
economically powerful firms
comply with labor laws in China?
Ying Chen
College of Business, University of Rhode Island, Kingston, Rhode Island, USA, and
Yuanyuan Sun
Department of Economics, University of Illinois at Urbana-Champaign, Urbana,
Illinois, USA
Abstract
Purpose –This study investigates, from a resource dependence perspective, the effects of domestic private
firms’political connections and economic power on their labor law compliance in China.
Design/methodology/approach –This study used data from a large-scale nationwide survey on Chinese
domestic privatefirms, the Chinese Private Enterprise Survey collected from 2004 to 2012, to examine factors of
interest that affect firms’compliance to labor laws. Hypotheses were tested using OLS regression models with
robust standard errors.
Findings –The results indicate that domestic private firms’institutional political connections specified by the
presence of a union or a Chinese Communist Party committee is positively related to firms’labor law
compliance, and firm owners’formal political connections indicated by their membership in the People’s
Congress or the Chinese People’s Political Consultative Conference have a somewhat negative effect. The post-
hoc analysis shows that firm owners’political representation at the county and city levels is negatively related
with labor law compliance, while the political representation at the national level is positively related to labor
law compliance. Moreover, the economic power of a domestic private firm is related positively to its labor law
compliance. Finally, although the authors did not find evidence that the 2008 Labor Contract Law increased
labor contract coverage, it did increase pension coverage after 2008.
Research limitations/implications –The present study reveals a more refined relationship between
domestic private firm owners’political connections and the degree of labor law compliance. It also
demonstrates that the economic power of domestic private firms has a positive effect on their labor law
compliance. This implies the importance of the contribution of domestic private firms to economic and social
development in China, warranting continued support of the development of the private sector in China.
Originality/value –This study adds to the sparse literature on the determinants of domestic private firms’
labor law compliance in China. It also sheds light on whether political connections and the rising economic
power of Chinese domestic private firms influence their compliance with labor laws.
Keywords Labor law compliance, Labor contract law, Political connections, Domestic private firms, China
Paper type Research paper
After China’s first labor law took effect in 1995, owing to the central government’sincreasing
concerns about social harmony and industrial peace, China’s labor law legislation has gradually
moved away from enhancing firm autonomy and efficiency toward reducing inequality and
enhancing social justice. One such milestoneis the Labor Contract Law promulgated on January 1,
2008. This law was the Chinese government’s direct attempt to balance the power structure
between workers and employers by providing more protection to workers and specifying penalties
for employers who fail to follow the law. A natural question that arises from the government’s
endeavors to strengthen labor protection is: Do firms comply with the labor regulations?
Do firms
comply with
labor laws in
China?
803
The authors thank Xin Tong, Jianzhong Dai, and Ray Friedman for their help and valuable comments on
this study.
The authors made equal contribution to the paper.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/0142-5455.htm
Received 30 July 2020
Revised 30 May 2021
2 December 2021
Accepted 21 December 2021
Employee Relations: The
International Journal
Vol. 44 No. 4, 2022
pp. 803-832
© Emerald Publishing Limited
0142-5455
DOI 10.1108/ER-07-2020-0360
Firms vary in their responses to institutional pressures, particularly in China, where law
enforcement has been historically weak (Zheng, 2009). Most studies on China’slaborlawshave
focused on legal rules, procedures and loopholes (Cooney, 2007); the effects of the Labor Contra ct
Law on the labor market (Chen and Funke, 2009); firm management and performance(Tsai and
Tien, 2010); and individual workers’well-being (Cheng et al., 2015). Even though labor laws aim
to regulateemployers’behaviors,the degree of firms’compliance withlabor laws and therelated
factors affecting compliance remain largely unknown. With a few notable exceptions (e.g. Cao
and Rubin, 2014;Yan and Xu , 2021), in previous research the effects of firms’political
connections and economic power on firms’labor law compliance has rarely been studied.
In this paper, we study exclusively the effects of firms’political connections and economic
power on their labor law compliance for one specific category of firms in China: domestic private
firms. Following the Chinese government’s definition of domestic private firms (Zhang andVan
Stel, 2016), we define a domestic private firmas a unit with privately owned assets that hires more
than eight employees. On theone hand, the overall economic importance of domestic private firms
has been increasing significantly over the last 40 years after they regained their legitimacy in the
1980s. Under socialist ideology, domestic private firms in China were banned after 1949; and by
1978, domestic private firms no longer existed in China. However, after more than 40 years of post
market-oriented reform, China had 18.9 million domesticprivate firms (NBS, 2019) that employed
139.52 million employees, or 32.1% of total employment in urban China (NBS, 2018). On the other
hand, domestic private firm owners (which we also call private entrepreneursin this paper) have
gained greater political influence than before. Because domestic private firms were regarded as
“exploiters,”for quite a long period of time they were banned from joining the ruling Chinese
Communist Party (CCP) and occupied only a marginalized political and social status. However,
since 1991 they have been encouraged to join the CCP. According to the official survey, the
percentage of CCP members among private entrepreneurs increased from 13% in 1993 to33% in
2012 (Ma and He, 2018), and they were co-opted into various powerful political organizations such
as the People’s Congress (PC) (Dickson, 2003).
Private entrepreneurs’increasing economic power and political influence has led to
speculation on whether they would utilize their economic power and political connections to
circumvent labor laws (Li, 2008). Recent research indicates that domestic private firms were
more likely to violate labor standards compared to firms of other ownership types such as
state-owned and foreign-owned firms (Li et al., 2019); in particular, domestic private firms
lagged furthest behind in providing social insurance benefits to their employees (Gao and
Rickne, 2014). Furthermore, domestic private firms were considered “exploitative capitalist
producers”in Marxist discourse, and their legitimacy in the socialist regime has been
constantly challenged ever since their revival. Therefore, what factors affect labor law
compliance among domestic private firms in China is an important area of study for both
academic inquiry and effective policymaking in enhancing labor law compliance in China.
Drawing on resource dependence theory (RDT) and using data from a nationwide survey
of Chinese domestic private firms, this study aims to improve the understanding of domestic
private firms’labor law compliance by systematically examining the effects of domestic
private firms’political connections and economic power on their labor law compliance. We
also investigate whether strengthened labor regulations (i.e. the 2008 Labor Contract Law)
affect domestic private firms’labor law compliance in China.
We move beyond previous studies (Chen and Touve, 2011;Xin and Pearce, 1996), which
mostly focused on private entrepreneurs’personal ties or formal political connections but
ignored domestic private firms’institutional political connections with the government
through the political entities within a firm. Rather, in this paper, we expanded the definition
and operationalization of political connections in China by distinguishing two types of
domestic private firms’formal political connections. The first type of formal political
connections is through within-firm’s political entities, or institutional political connections.
ER
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