Causes of labor retrenchment in vietnam evidence from firm based data

Using descriptive statistic and regression model, the results are found that enterprise’s performance measured by output; training cost for labor, wage rate; factors such as debt, firm a

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUES

VIETNAM THE NETHERLANDS

VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

CAUSES OF LABOR RETRENCHMENT IN

VIETNAM: EVIDENCE FROM FIRM-BASED DATA

By

NGUYEN THI THANH NHAN

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, DECEMBER 2012

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUES

VIETNAM THE NETHERLANDS

VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

CAUSES OF LABOR RETRENCHMENT IN

VIETNAM: EVIDENCE FROM FIRM-BASED DATA

A thesis submitted in partial fulfilment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

NGUYEN THI THANH NHAN

Academic surpervisor

Dr PHAM KHANH NAM

HO CHI MINH CITY, DECEMBER 2012

ABSTRACT

Labor retrenchment is one of the most important issues of enterprises during the reform process in a transition economy, especially in the market economy In the recent years, the number of labor fired in Vietnamese enterprise has risen rapidly The question of whether which factors impact on labor retrenchment in firms is still considered Therefore, this paper examines the causes of labor retrenchment in Vietnam I focus on micro, small and medium enterprises using firm-level in Small and Medium Vietnamese Enterprises Survey in 2009 Using descriptive statistic and regression model, the results are found that enterprise’s performance measured by output; training cost for labor, wage rate; factors such as debt, firm age, firm size and competition; impact on the degree of labor retrenchment Technological innovation measured by equipment investment affects labor retrenchment in a firm insignificantly

KEYWORDS

Labor retrenchment

Micro, Small and Medium Enterprises

Vietnam

TABLE OF CONTENTS

Page

ABSTRACT……… i

TABLE OF CONTENTS………ii

LIST OF FIGURES, TABLES AND GRAPHES ……… vii

1 INTRODUCTION……… ……… 1

1.1 Problem statement……… 1

1.2 Research objectives and research questions………3

1.3 Data resources and research methodology……… 4

1.4 Structure……… 5

2 LITERATURE REVIEW ……… 6

2.1 Definition……… 6

2.2 Theories………7

2.3 Empirical studies on determinants of labor retrenchment……… 12

2.3.1 Empirical studides before 2000 year……….………13

2.3.2 Empirical studies after 2000 year……… 15

2.4 Summary…… ……… 18

3 RESEARCH METHODOLOGY………… ………20

3.1 Data………20

3.1.1 Data resources and sample size………20

3.1.2 Variables……….21

3.2 Research methodology……….21

3.2.1 Conceptual framework……… 22

3.2.2 Model……….……… 27

3.2.3 Variable descriptions ……… 29

3.2.4 Summary ……… 36

4 ANALYSIS RESULTS……… ……….44

4.1 Regression results……… 44

4.1.1 Descriptive statistics……… 44

4.1.2 Regression results………49

4.2 Summary ……… 52

5 CONCLUSIONS……… ……… 53

5.1 Conclusion……… 53

5.2 Recommendation……… 55

5.3 Limitation……… 56

REFERENCES……… ……….viii

APPENDIX….……… xxi

LIST OF FIGURES, TABLES AND GRAPHES

FIGURE 2.1 Determinants of labor retrenchment in empirical studies…… 19

FIGURE 3.1 Conceptual framework ……… 23

TABLE 3.1 Sample distribution……… 30

TABLE 4.1 Summary statistics……… 44

TABLE 4.3 Regression results……… 49

TABLE A1 Empirical studies summary………xi

TABLE A2 Criteria for small and medium enterprise according to the decree No 56/2009 NĐ-CP dated 30 June 2009 of the government……xvi

TABLE A3 Variable discriptions………

Table A4 Correlation matrix of dependent and independent variables in efficiency model GRAPH 4.1 LARERA (used in Tobit model)……… 46

GRAPH 4.2 LARERA (used in Logit model)……… 46

1 INTRODUCTION

1.1 Problem statement

Vietnam is a transition economy, changing from a centrally plan economy to market economy, specifically, being introduced the so-called Doi Moi reforms to make its transition in 1986 In July 1995, Vietnam became the seventh member of Association of Southeast Asia Nations In the early 2000s, Vietnam integrated into the large world of economy rapidly Moreover, Vietnam has been a member of World Trade Organization in 2006, making more investment opportunities to develop economy

In the overall view related to economy, through assessment of international organizations, Vietnam’s economy has significantly grown First, according to the evaluation report on the investment environment of the World Bank and International Financial Company, Vietnam’s economy ranked from 91st among 178 economies in 2007 to 93rd among 183 economies in 2009 (General Statistic Office, 2010) In terms of two indices of “loan” and “contract implementation,” they were improved remarkably More specifically, “loan” index ranked from 43 in 2008 to 30

in 2009, meaning that it improved 13 steps “Contract implementation” index ranking from 42 in 2008 to 32 in 2009, improving 10 steps (General Statistic Office, 2010) Furthermore, World Bank assessed that Vietnam had considerably improved both tax area and international trade area Moreover, Vietnam had many efforts in improving the business environment Therefore, Vietnam will create a more favourable business environment to develop enterprises and to attract foreign investment in the coming years Second, according to assessment of United Nations Conference on Trade and Development (UNCTD), Vietnam has improved many factors in the business environment, and Vietnam was one of the top fifteen countries attracting more foreign direct investment (FDI) in the world As an illustration, China, The United States, India, Brazil and Russia are five most attractive countries to FDI in the world in the period of 2009 to 2011 Meanwhile,

Vietnam was one of fifteen countries in attracting FDI in that period, being one of the top six countries attracting investors from Japan and other developing countries

in Asia Finally, although international organization assessed that Vietnam has implemented many policies to improve the business environment in the recent years However, there are many fields needed reform to enhance the national competitiveness capacity, and to impact positively on the business performance of all enterprises

In the specific view related to enterprise’s development in Vietnam, the number of enterprises increased fast in 2009 According to survey of General Statistic Office

in 2010, up to 1 January 2009, non-state-owned enterprises increase rapidly in terms

of quality, creating jobs for workers To illustrate that number of active non-state- owned enterprises was 196779 enterprises, accounting for 95.7% total enterprises, being equal 5.6 times as many as that in 2000 In terms of micro, small, and medium enterprises, the number of firm increase significantly Although there are many firms established in the recent years, there is the large labor retrenched Undeniably, in the transition economies and developing countries, the labor retrenchment in enterprises is one of the most important reform programs In the foreign countries, there are empirical studies related to determinants of labor retrenchment in state-owned enterprises They found that there is the relationship between firm size, productivity and hiring standards, meaning that firm behavior in which firms choose to hire standard to maximize profit’s impact on labor retrenchment in a firm (Weiss, 1984) Furthermore, the development of technology affected significantly on the labor retrenchment in firms A large number of enterprises faced labor surplus after applying modern technologies Therefore, retrenchment of labor is a very crucial problem of enterprises during the transition process to the market economies, especially in the market economy with competition among firms (Pinto et al, 1993)

According to these reasons, this paper determines which factors impact on the labor retrenchment program in micro, small, and medium enterprises in terms of firm-

level, using data set from Vietnamese Small and Medium Enterprises survey in

Questions related to enterprising performances:

 Is there the negative relationship between the degree of labor retrenchment and output?

 Is there the negative relationship between the degree of labor retrenchment and training cost?

 Is there the positive relationship between the degree of labor retrenchment and wage rate?

 Is there the positive relationship between the degree of labor retrenchment and debt?

Questions related to technological innovation:

1 Criteria to for a micro, small, and large medium enterprise according to the decree No 56/2009/NĐ-CP dated 30 June 2009 of the Government is presented in Table 2 in appendix

 Is there the positive relationship between the degree of labor retrenchment and technology equipment investment?

Questions related to other factors:

 Is there the positive relationship between the degree of labor retrenchment and firm age?

 Is there the positive relationship between the degree of labor retrenchment and firm size?

 Is there the positive relationship between the degree of labor retrenchment and competition?

2 LITERATURE REVIEW

2.1 Definition

Definition needing to be focused is labor retrenchment According to empirical studies, labor retrenchment is defined as the labor reduction, and the ratio of a labor reduction is defined as number labor reduction in the current period divided by the total labor force of the preceding period (Hu & Wong, 2004) Another definition, labor retrenchment is defined as labor discharged and the rate of labor discharged, which is computed as the ratio of layoffs to the total employment (Dong, 2012)

2.2 Theories

There are many theories related to labor market However, in this study just analyzes labor market theory to estimate reasons of labor retrenchment More specifically, based on labor market theory, it is straightforward to find determinants impacting on labor demand and labor retrenchment The small part in this section presents empirical studies related to determinants of labor demand

Human capital

Human capital is designated as the flow of productive services provided by a worker (Fine, 1998) It is accumulated through education, training, work experience

and how it is used and rewarded Investing in human capital plays a crucial role in development strategies in enterprises The many ways to invest include schooling, on- the- job training, medical care, vitamin consumption, and acquiring information about the economic system (Becker, 1962) Furthermore, according to Becker (1993), he defined human capital as people’s knowledge and abilities, which can be achieved by education and trainings More investment in human capital may make more profit In other words, investment in human capital improves the labor productivity The question of whether investment in human capital is related to labor retrenchment is considered in this study

π = pQ - wL - r ͞K Where p, w and r are price of output, the exogenous prices of labor and capital services, respectively The employer is trying to maximize profit The wage is just only cost of labor to the employer The labor market is competitive

Based on other theories, in the long-run, the labor demand depends on some determinants such as output, capital, and technology (Brechling, 1965) The firm’s demand function of labor services can be written as following:

Es = f(Q, K, T)

Where:

Es stands for labor services

Q stands for output

K is the stock of capital

T is the state of technology

In general, the expectation is that the partial derivatives of this function to have the followings signs:

> 0, < 0 and < 0

It means that labor demand and output in the firm are positive relationship, labor demand and the stock of capital is the negative relationship, labor demand and the state of technology is the negative correlation

According to theory relating to the demand for labor in the long-run of Hamermesh (1986), the theoretical discussion is divided into two parts: part one presents demand for labor in the two-factor case, part two shows in multi-factor case

Assuming that production exhibits constant’s returns to scale, as described by F, as following:

Y = F (L, K), Fi >0, Fii <0, Fij >0 (1)

Where Y is output, L is labor inputs and K is a capital A firm that maximizes profit subject to a limit on cost will set the marginal value product of each factor equal to each price

the cost constraint Assuming that price of output is unity The enterprise will operate under cost constraint:

C0 – wL – rK = 0 (2c)

The ratio of equation (2a) and (2b) is familiar statement that the marginal rate of technical substitution equals the factor – price ratio for a profit-maximizing enterprise [Hamermesh (1986), pp 431]

According to Allen (1938), the elasticity of substitution between the services of capital and labor as the impact of a change in relative factor prices on relative inputs

of two factors In this case, holding output is constant Alternatively, it is the effect

of change in the marginal rate of technical substitution on the ratio of input factors, being defined as an elasticity In terms of the two-factor linear homogeneous cases,

in where, s = wL/Y, meaning that the share of labor in total revenue

The cross-elasticity of demand for capital services is as follows:

ηLK = [1-s] σ > 0 (4b)

Both equation (4a) and (4b) reflect just only substitution along an isoquant When wage rate increases, the cost of producing given output rises; and the product price will increase The result is that reducing the quantity of output sold And the share

d ln(K/L) d ln(K/L) FLFK

σ = = =

d ln(w/r) d ln(FL/FK) Y FLK

of labor in total cost, and the absolute value of the elasticity of product demand effect on scale These results are the most crucial in the theory of labor demand (Hamermesh, 1986)

Determinants of labor demand

According to empirical studies, the basic determinants of slope of labor demand include the diminishing marginal product of labor, changing in elasticity of product demand as output varies, and complementarities across firms and industries (Robert, 1991)

Based on the empirical study of Bernal (2003), this paper is related to

“determinants of labor demand in Colombia.” The main results of the paper are as

following First, labor demand elasticities in Colombia are around negative zero point five, which is not low2 by the international standards Second, the wage elasticity of labor demand increases (in absolute terms) during contractions Hence, the increase in prices and the beginning of a recession period had a significant impact on employment Finally, the adjustment costs of changing labor as well as wage elasticities were not affected by changes in the regulation relating to severance payments and dismissal costs In summary, wage rate is one of the most crucial factors of labor demand

Besides wage rate, there are some factors impacting on labor demand According to Dong & Xu (2009), this paper presents the determinants and patterns of the labor restructuring process in China, using firm-level panel data Data is collected from the urban enterprises annual survey from 1986 to 1990 The main results show that the employment adjustment and downsizing process has been driven significantly

by market force Authors found a resemblance in the patterns of firm response to demand shocks across the public and private sectors Another result is that employment changes are positive correlations with sales revenue It is the negative

2 (in absolute terms) Assuming that all increase in taxes and contributions implied an increase in labor cost

correlations with wage, number of competitors and firm tax rate Interestingly, there

is the negative correlation between firm size and firm age with employment expansion

Conclusion, determinants of labor demand from empirical studies are sales revenue, wage rate and market power Undeniably, determinants of labor demand in firm and causes of labor retrenchment in a firm are similar Therefore, empirical studies related to determinants of labor demand play a key role to estimate factors impacting on labor retrenchment in enterprises

2.3 Empirical studies on determinants of labor retrenchment

Labor retrenchment theories used empirical studies are crucial to estimate causes of labor retrenchment in enterprises There is a large volume of published studies describing why firms retrench labor This part presents empirical studies3 on determinants of labor retrenchment

2.3.1 Empirical studies before 2000 year

First, studies are related to labor retrenchment and firm performances According to these empirical studies, layoffs are more when enterprises perform poorly (Kang, 1997)4 So there is the correlation between firm performance and labor laid off, meaning that enterprise performance and labor retrenchment are correlation (Kang, 1997) This theory used to estimate the relationship between labor retrenchment and firm performances in the long-run According to Fay & Medoff (1985), there is the correlation between labor and output in the short-run Therefore, this study will estimate the relationship between labor reduction and output in a firm to answer the question of whether there is the existence of this correlation

Second, theory is related to technological innovation and labor reduction According to Barron (1987), manager will consider rate of labor hired, and rate of capital investment to maximize profit and minimize product costs It means that if a firm invests more cost in technological innovation, it will ponder on the number of labor hired Therefore, labor hired and technological innovation costs are correlation

Third, historian has argued that firm performances, firms downsize their operation

by closing plans, selling asset, reducing capital expenditures, and employee layoffs (Kang, 1997) Based on regression results, one of the main results is that the probability of layoffs is positive related to the equity ownership by the firm’s main bank It means that probability of layoffs and equity ownership is correlation In other words, there is the relationship between labor retrenchment and total asset of a firm

Next, theory is referred to debt and labor retrenchment in firms According to Hanka (1998), the result from his research is that the high debt to a firm is associated with employment reduction That is the reason why this study will estimate the relationship between debt and labor retrenchment in micro, small, and medium enterprises

Another point which should be mentioned is that theory referring to training cost and labor retrenchment The most economic theorists have emphasized the role of education, and technological development to improve productivity (Nelson, 1966) Undeniably, labor with higher skill will work more effectively However, employers must select a rate of hire, a training program for both existing labor and new labor, a compensation package and rate of capital to invest and minimizing a production cost (Barron et al, 1987) Therefore, managers will consider rate of labor hired; labor fired and training cost to reduce total input costs and to improve productivity In other words, there is the relationship between labor retrenchment, labor hired and training costs

The firm behavior theory in which enterprises select a hiring standard to maximize profits is considered There is a correlation between firm size, wages and employment hiring standard (Weiss & Landau, 1984) More specifically, firms select a wage and hiring criterion to satisfy demand for labor at the minimum cost And firm size and wages are positive correlation (Weiss & Landau, 1984) When more people hired, more wages will be paid out (Sen, 1999) Therefore, if wage rate

is increased, the number of people hired may reduce In other words, there is the striking point is the existence relationship between wages and number of labor hired.5 Therefore, there is the relationship between wages and labor retrenchment in enterprises

2.3.2 Empirical studies after 2000 year

According to Appleton (2002), empirical study relating to causes of labor retrenchment The main aim of this paper is to estimate labor retrenchment issue in China This paper examines the individual-level determinants and consequences of the xi-a-gang policy, using a survey conducted in the year 2000 and semi-parametric model; testing omitted heterogeneity After estimating, determinants affect on labor retrenchment rate such as education, working skill, age, productivity, and training cost The findings are that the risk of retrenchment was higher for women, the less educated, the low skilled, the middle-aged, and those employed by local government or urban collectives Moreover, the individual received training from enterprise to enhance a skill would be lower risk of retrenchment than others

According to Hu (2004), this study estimated reasons of labor retrenchment in level covering 323 state-owned enterprises in China in the late 1990s The model is

In model, dependent variable is labor retrenchment rate (Y), and independent variables are political-economic factors (P): government’s fiscal position; variable’s business relating to factors (X): competition and enterprise performance measured by sales revenue and profit; and control variables (Control) including SOEs size, SOEs age and industrial dummy’s variables

Based on regression results, there are some main findings In terms of enterprise performance, enterprise performance is significant and negative correlation with the degree of labor retrenchment However, a reduction in an enterprise’s excessive labor is unlikely to impact its capacity and sales revenue In terms of competition, market competition becomes an effective disciplinary force for managers of SOEs

in China In terms of government’s financial position, labor retrenchment in SOEs

is related to government’s fiscal position Finally, in terms of some control variables such as firm age and firm size, age is positive relationship with labor retrenchment

in SOEs The reason is that older SOEs tend to have been higher level of organization inertia Size is a positive effect on labor retrenchment in SOEs, since large firms have more redundant labor than smaller firms Conclusion, determinants impacting on labor retrenchment in SOEs include enterprise performance, market competition, government’s fiscal position, firm age and firm size

According to Dong & Xu (2009), this paper presents the determinants and patterns through a labor restructuring process in China, using firm-level panel data Data is collected from the urban enterprises annual survey from 1986 to 1990 The main results are that the employment adjustment and downsizing process has been driven significantly by market force, the patterns of firm response to demand shocks across the public and private sectors Another result is that employment changes are positive correlations with sales revenue, being negative correlation with wage, number of competitors and firm tax rate Interestingly, correlation between firm size and firm age with employment expansion is negative Since determinants of labor demand in this paper are the same determinants of labor retrenchment in the

conceptual framework, therefore, this paper is one of the important empirical studies

According to Dong (2012), this paper estimated the causes of labor retrenchment and presented that there are differences in male and female labor retrenchment in enterprises Data is firm – level, including 683 state-owned enterprises for the period from 1995 to 2001 Focusing on the regression model to estimate determinants of labor retrenchment, dependent variable is labor discharge rate, independent variables are a growth rate (Y); wage rate (W); time trend (T); X is covariate control variable: size of firm, age of firm, state ownership, temporary labor…; (n) is the specific fixed effects of firms; (ε) is an error term

dcrate it = β 0 + β 1 Y it -1 + β 2 T t + β 3 W it – 1 + β 4 X it + n i + ε it

In determinations of labor discharged rate regression, the results found that labor discharged rates would be lower for higher growth enterprises Second, labor discharged rates would be higher for enterprises that experienced higher wage growth Third, older firms which tend to have greater labor redundancy may have higher discharged rates Next, the retrenchment rate may also differ by size of an enterprise, meaning that smaller enterprises may be higher rate of labor discharged than larger ones Moreover, the share of state ownership is lower, the incentive for enterprise to lay off labor is greater Lastly, SOEs with a larger proportion of temporary workers had higher latitude to adjust the workforce to markets institution, and consequently, would have higher the degree of labor discharged

Conclusion, according to empirical studies, factors impacting on labor retrenchment

in SOEs include revenue, profit, wage rate, firm size, firm age and the ratio of temporary labor in a firm As an illustration in Figure 2.16, it summarizes determinants of labor retrenchment in empirical studies

6 Figure 2.1 is presented in the next page

2.4 Summary

There are many causes of labor retrenchment in enterprises There are elements of enterprise performances measured by output or profit, elements of technological innovation measured new equipment cost, technological research and development cost, and other factors such as labor force or firm size, age firm, firm’s debt, training cost to labor, and assets According to empirical studies, this study will eliminate which reasons of labor retrenchment in enterprises

Figure 2.1 Determinants of labor retrenchment in empirical studies

Firm age

(Hu, 2004)(Dong, 2012)

in enterprises

3 RESEARCH METHODOLOGY

3.1 Data

3.1.1 Data sources and sample size

The data collected from Small and Medium Enterprises (SMEs) data in Viet Nam in

2009 In terms of enterprises, it covers 1465 firms, in terms of observations, there are 1465 observations The sample enterprises are randomly drawn in ten cities and provinces in 2009 A summary of enterprise distribution across cities is illustrated

in the below Table 3.1

Table 3.1: Sample distribution

Cities and provinces Observations

Before coming to hypotheses in the study, the first thing which should be mentioned

is a conceptual framework, concluding from empirical studies Based on that framework, it is straightforward to propose the expectation on hypotheses Figure 3.1 illustrates the conceptual framework

Figure 3.1 Conceptual framework

Labor retrenchment

Technological innovation

Competition (H3.3)

Other factors (H3)

Wage rate (H1.3)

According to the conceptual framework and empirical studies, the presentation of how dependent and independent variables selected and the expected relationships

between variables are as following

Undeniably, there are many factors impacting on labor retrenchment in enterprises

It is worth stating from the outset that the labor input of enterprise is considered based on a production function, price of input, and expected sales (Wong et al, 2004) Therefore, many people assume that labor retrenchment function is related to business factors Furthermore, when it comes to the business factors, empirical studies show that downsizing of a labor force is one of the most steps to adjust strategies following enterprise’s performance decline (Denis and Kruse, 2000) and (Kang and Shivdasani, 1997) Moreover, there is the relationship between the degree

of labor retrenchment and output (Dong, 2012) In other words, employment cutbacks may be expected to increase enterprise productivity by eliminating redundant labor (Dong, 2005) One of the main results of empirical papers presents that labor retrenchment degree would be lower for higher growth enterprises Therefore, the expectation is that there is a correlation between labor retrenchment and total output in a firm

H1.1: There is the negative relationship between output and the degree of labor retrenchment

Interestingly, based on the previous studies relating to determinants of labor discharged rate, there is the relationship between labor retrenchment degree and training labor If firms give more training cost to employee, firms would less lay off those employees Undeniably, training cost to upgrade labor skill is high Labor productivity may be improved after training course So there is a relationship between training labor and labor retrenchment (Appleton et al, 2002) Firms will retrench a few labors after upgrading labor skill or spending training cost for employees Therefore, training cost and labor retrenchment is negative correlation

H1.2: There is the negative relationship between training cost and the degree of labor retrenchment

Based on the empirical study of Weiss and Landau in 1984, wage and hiring standard is the strong relationship The question of whether there is existent the relationship between wage and labor retrenchment degree is still considered Therefore, firm may retrench more labor if total material cost is so high Another point which should be mentioned is that there is the existence of relationship between the degree of labor retrenchment and total cost (Dong, 2012) Due to cutting redundant labor can reduce input cost without impacting production capacity and sales Wage rate is higher; labor reduction in firms will be more (Weiss and Landau, 1984) In this study, the hypothesis is that wages rate rise; firm will fire more labor forces to reduce total costs

H1.3: There is the positive relationship between wage rate and the degree of labor retrenchment

According to empirical studies, capital firm plays a crucial role to invest and improve productivity (Dong, 2005) The question of whether firms have debt impacting on labor retrenchment is considered Undeniably, firms have more debt, which will meet more obstacles associated with capital One of the most feasible solutions to resolve that issue is labor reduction Therefore, this study will eliminate the relationship between labor retrenchment and debt of a firm

H1.4: There is the positive relationship between debt of firm and the degree of labor retrenchment

When it comes to the technological innovation, many firms are under pressure to upgrade the technology in market economy, the investment of technological development more increase, and those firms would have surplus labor, undergoing large job cut meaning that the degree of labor retrenchment raises (Dong, 2009) Interestingly, there is the relationship between labor retrenchment and firm’s asset There is a change from labor to capital in some firms Firm fires labor force to

reduce labor cost and to raise investment in assets (Dong, 2005) Undeniably, many firms are facing the competition in the market, investing in modern machines and equipments plays a key role to improve firm performance So this paper will test to eliminate whether there is the association between technology equipment investment and labor retrenchment

H2.1: There is the positive relationship between technology equipment investment and the degree of labor retrenchment

Another point which should be mentioned is that age of firm impacts on labor retrenchment According to Dong (2012), older firms, which tend to have greater labor redundancy, may have a higher labor retrenchment degree (Dong, 2012) According to Hu et al (2004), enterprise’s age has the positive effect on corporatized SOEs but little effect on traditional SOEs Therefore, the expectation

in this study is that firm age and labor retrenchment is the positive correlation

H3.1: There is the positive relationship between firm age and the degree of labor retrenchment

Moreover, firm size affects the degree of labor retrenchment According to empirical study, smaller enterprises may be higher the rate of labor retrenchment than larger firms (Dong, 2012) The reason is that small firms are more vulnerable

by change market than large ones Therefore, the small firms will restructure capital, labor and investment plan However, other empirical studies found that there is the positive relationship between labor retrenchment and firm size Lager firms tend to redundant labor So, large enterprise cut labor more than small enterprise (Hu et al, 2004) In the crisis economy, enterprises with large labor force tend to redundant labor than small enterprises Therefore, in the study, the expectation is that the correlation of firm size and labor retrenchment degree is

positive

H3.2: There is the positive relationship between firm size and the degree of labor retrenchment