Public firms' merger, employment, and welfare in developing countries: A general equilibrium analysis

• Published date: 01 May 2018
• Author: Mong Shan Ee,Chi‐Chur Chao,Leonard F. S. Wang
• Date: 01 May 2018
• DOI: http://doi.org/10.1111/rode.12364

REGULAR ARTICLE

Public firms’merger, employment, and welfare in

developing countries: A general equilibrium

analysis

Chi-Chur Chao

1

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Mong Shan Ee

1

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Leonard F. S. Wang

2

1

Deakin Business School, Deakin

University, Geelong, Australia

2

Zhongnan University of Economics and

Law, Wuhan, China

Correspondence

Leonard F. S. Wang, Wenlan School of

Business, Zhongnan University of

Economics and Law, No. 182 Nanhu

Avenue, East Lake High-tech

Development Zone, Wuhan 430073,

China.

E-mail: lfswang@gmail.com

Abstract

This paper examines the effect of a merger of state-

owned firms on wage gap, employment, and social wel-

fare in a general equilibrium setting. For a developing

economy with state-owned firms in the urban sector, a

merger via a reduction in the number of the urban state-

owned firms can reduce the cost of capital. It then lowers

the skilled wage rate through the factor-substitution

effect, while it raises the unskilled wage by the inflow of

capital to the rural sector and hence lowers urban unem-

ployment. In addition, the reduction in the number of the

urban state-owned firms can yield a scale effect to the

firms. The beneficial effects on higher urban output and

less urban unemployment can improve social welfare of

the developing economy.

1

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INTRODUCTION

Merger and privatization are the main strategies employed by the Chinese government in reforming

its public or state-owned enterprises (SOEs). During the past SOE reform motivated by China’s

accession to World Trade Organization in 1995, the Chinese government initiated the “retain the

large, release the small”policy that resulted in a massive number of SOEs being privatized.

Although privatization of SOEs leads to an increase of productivity in both privatized and remain-

ing SOEs (Hsieh & Song, 2015), during this reform process an increasing wage gap between

skilled and unskilled labor had been identified as one of the many problems facing China (Apple-

ton, Song, & Xia, 2014). One of the reasons for such wage inequality is that privatization has led

to a shortage of skilled labor and a drastic retrenchment of (unskilled) workers in those enterprises.

DOI: 10.1111/rode.12364

Rev Dev Econ. 2018;22:727–735. wileyonlinelibrary.com/journal/rode ©2017 John Wiley & Sons Ltd

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