Does government investment push up manufacturing labor costs? Evidence from China

This paper investigates the rapid increase in China's manufacturing labor costs, focusing on the role of government investment. The authors argue that government preference for infrastructure investment creates labor demand and increases labor costs. Additionally, infrastructure improvements lower transaction costs for businesses, leading to production expansion and further cost increases. Empirical findings, supported by robustness tests, indicate that a 1% increase in government investment leads to a 0.0013-unit rise in unit labor cost and a 1.443-unit increase in nominal labor cost. The paper concludes that China should manage government investment to maintain moderate labor cost growth and ensure sustainable enterprise development.

Yang Liuyi, Zhu Yunchan, Ren Feirong