The SOE Reform, Massive Layoff and Private Economy Boom in China

Abstract

How does the reform of state-owned enterprises (SOEs) contribute to the economic transition within socialist economies? This paper tries to answer this question by investigating the consequences of the SOE reform in 1997 China, which led to more than 28 million SOE workers being dismissed, causing the Massive Layoff. Employing a continuous Difference-in-Differences (DID) design, this study establishes a causal link between the Massive Layoff and the emergence of China’s private economy in the late 1990s and early 2000s. Specifically, the Massive Layoff incentivizes entrepreneurship and prompts SOE workers to flow into the private market. Moreover, at the firm level, I find that the Massive Layoff induces a productivity shock to the manufacturing POEs, increasing their labor input, output, and productivity. Overall, this paper suggests that when evaluating the SOE restructuring policy, one should also consider broader implications related to the private economy.