Labour cost stickiness in family firms: the balance between workforce retention and productivity

We find that family-owned firms in China exhibit higher labour cost stickiness. The result is robust to a range of tests, including instrumental variable regressions that use rice cultivation as an instrument, as well as a difference-in-differences design exploiting executive divorces in family firms. Compared with non-family firms, family firms are less inclined to reduce their workforce when sales decline. Instead, they prioritise job retention, particularly for less-educated and less-skilled employees, over wage adjustments. Cross-sectional analyses further indicate that this tendency is more pronounced in firms with stronger kinship ties, executives with local roots, regions characterised by lower population mobility, and areas with weaker marketisation. Finally, we show that the relatively lower total factor productivity observed in family firms can be largely attributed to their reluctance to cut labour costs during periods of declining sales.