The employment and wage effects of export VAT rebates: evidence from China
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The employment and wage effects of export VAT rebates: evidence from China Bo Gao1 · Jing Ma2 · Zheng Wang3 Accepted: 27 October 2020 © The Author(s) 2020
Abstract This paper studies the employment and wage effects of VAT rebates to exporters with comprehensive firm-product-level data of China. It is found that the adjustments in VAT rebates significantly and positively affect firm’s employment but have no statistically significant effect on firm’s wage. Moreover, this paper finds that the employment effect of VAT rebates is heterogeneous across firms. In particular, low-productivity firms are more sensitive to the adjustments of VAT rebates than high-productivity firms, suggesting that an increase of VAT rebates may cause mis-reallocation of resources. Keywords VAT rebates · Employment · Wage · Firm heterogeneity · Trade policy JEL Classification F14 · F16 · H32 · J23
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s1029 0-020-00400-3) contains supplementary material, which is available to authorized users. * Bo Gao [email protected] 1
School of Business and Economics, Loughborough University, Loughborough, UK
2
Department of Economics and Marketing, De Montfort University, Leicester, UK
3
Faculty of Business and Law, De Montfort University, Leicester, UK
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1 Introduction In open economies, trade policy has been considered as an important influencing factor of the labor market.1 The input value added tax (VAT) rebates to exporters have been a commonly used and frequently adjusted trade policy in China. On average, VAT rebates have accounted for 1.8% of GDP and 10.8% of government total tax revenue for the last 15 years.2 The rates of VAT rebates have been adjusted more than 30 times since the country’s tax system reform in 1994. However, the impact of VAT rebates on the labor market is so far unclear. Does the benefit from the rebates pass through to the labor market? Do firms increase employment and/or wage when receiving higher rebates? This paper empirically addresses these questions by studying the employment and wage effects of VAT rebates with comprehensive linked firm-product-level data. Understanding the employment and wage effects of VAT rebates is important for two reasons. First, the trade literature of heterogeneous firms suggests that resource reallocation across firms is a natural consequence of trade liberalization, and it accounts for a significant part of the overall welfare effect of the trade policy.3 The adjustments of VAT rebates provide a unique setting for evaluating the impact of this specific trade policy on labor (mis-)reallocation across firms. Our study adds labor market evidence to the above-mentioned general literature. Second, the analysis of VAT rebates can shed light on the potential effects of export tax on the labor market, on which the evidence is rather limited. As shown by Feldstein and Krugman (1990), when VAT is only partially rebated, the non-refunded part effectively acts
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