WTO accession, input trade liberalization and employment adjustment in Chinese manufacturing

This paper examines how input trade liberalization affects manufacturing employment adjustment using highly disaggregated Chinese firm-level data. Employing a difference-in-differences estimation strategy, we find that input trade liberalization promotes firm net job growth along both the channels of increasing job creation and reducing job destruction. In addition, we explore the employment response to input trade liberalization of firms that are heterogeneous along two dimensions, i.e., initial relative productivity and import status. In particular, input trade liberalization leads to job destruction in the least productive firms, job creation in more productive firms and increases the exiting likelihood of the least productive firms; and the impact of input trade liberalization on job flows is more pronounced for importing firms than that for non-importers. We also find strong evidence that a good institutional environment strengthens the effects of input trade liberalization on both of the intensive and extensive margin of employment adjustment. As an extension, this paper further demonstrates that input trade liberalization promotes industrial productivity growth significantly, and the improvement of the job reallocation efficiency is one of the important channels.