In the rapidly evolving landscape of China’s urban economies, labor stands as a pivotal force driving growth and innovation. Yet, beneath the surface of this dynamic environment lies a persistent challenge that threatens the vitality and competitiveness of cities: the phenomenon of zombie firms. These are firms that, despite being economically unviable and heavily reliant on continued financial support, continue to operate due to ineffective market exit mechanisms. Recent research has brought to light how the widespread presence of zombie firms profoundly distorts labor mobility patterns, suppressing the influx of workers crucial for sustainable urban development.
This investigation leverages granular microdata from Chinese population censuses spanning 2000 to 2015 and complements it with industrial firm-level data from the Chinese Industrial Enterprise Database covering 1998 to 2013. The study presents a robust econometric analysis revealing a strong negative correlation between the share of zombie firms within cities and their ability to attract labor. Significantly, the study goes beyond correlation, employing instrumental variable regressions and comprehensive robustness checks to establish a causal relationship: a dense concentration of zombie enterprises directly contributes to labor outflow, undermining cities’ demographic and economic vitality.
From a technical standpoint, the study disentangles the underlying mechanisms that connect zombie firm prevalence to labor dynamics. Three channels emerge as critical conduits: industrial structure rigidity, entry barriers for new firms, and environmental degradation. The persistence of zombie firms leads to industrial stagnation by inhibiting structural upgrading. These lethargic industrial fabrics fail to generate the diversified and high-quality employment opportunities needed to entice inward labor migration. Moreover, the dominance of zombie firms creates high entry barriers for entrepreneurial ventures, thereby impeding vital market dynamism and limiting labor market inclusivity.
Environmental quality represents a third, and no less important, mechanism through which zombie firms exert their deleterious effects on labor mobility. These firms often operate with production inefficiencies and outdated technologies, exacerbating urban pollution levels. The resulting decline in environmental conditions not only diminishes the quality of urban life but also reduces a city’s attractiveness to outside talent, particularly younger and more environmentally conscious labor cohorts. This environmental dimension adds a crucial layer of complexity, underscoring the multifaceted impact of zombie firms beyond pure economic metrics.
Heterogeneity analyses provide deeper insight into demographic vulnerabilities by showing that low-skilled laborers, as well as younger and middle-aged workers, are disproportionately discouraged from migrating to cities burdened by high zombie firm concentrations. This is especially concerning in the context of China’s demographic trends marked by aging populations and the pressing need to cultivate a vibrant, youthful workforce capable of driving innovation and adapting to evolving industrial demands. The suppression of these vital segments hints at a broader issue of labor market polarization, potentially exacerbating socio-economic divides within and across regions.
The study’s findings carry profound implications for urban economic policy and market reform strategies. It highlights the critical need for market-oriented approaches that facilitate the efficient exit of zombie firms. Rather than relying on administrative edicts that often perpetuate inefficiencies through protectionist measures, the research advocates for reforms that empower market mechanisms to determine the survival or closure of firms. This would not only purge economically unviable entities but also catalyze the reallocation of resources to more productive and innovative sectors, enhancing overall urban economic resilience.
Complementing these structural reforms, the research underscores the importance of nurturing emerging industries and promoting industrial diversification as pathways to revitalizing urban labor markets. By aligning economic development with local resource endowments and broader industrial trends, cities can break free from overdependence on outdated, overcapacity sectors largely sustained by zombie firms. The diversification strategy promises a more vibrant industrial ecosystem capable of generating the diverse employment opportunities critical for drawing and retaining talent.
Environmental policies emerge as a strategic lever intertwined with economic reforms in the battle against zombie firms’ adverse effects. The study posits that the removal of zombie firms should also serve as an impetus for advancing urban green transformation efforts. Particularly for firms contributing directly or indirectly to severe pollution, closure should be considered even when conventional financial distress signals have not triggered liquidation protocols. Prioritizing environmental protection within urban development plans can help build healthier, more attractive cities that appeal to labor pools increasingly attuned to sustainability issues.
Furthermore, the study critiques existing policies that often provide financial lifelines to inefficient firms, perpetuating market distortions. It calls for governments to curtail such supports and instead deepen administrative and financial reforms aimed at enabling freer flows of credit, land-use rights, and other production factors under genuine market conditions. By optimizing resource allocation, such reforms can stimulate the entry and growth of new firms, fostering innovation and expanding quality employment opportunities—both essential for reversing labor outflows.
Despite its illuminating contributions, the study acknowledges several limitations, notably with respect to data availability and continuity. The microdata utilized extend only to 2015, leaving untapped more recent dynamics that may have been shaped by China’s ongoing structural and policy shifts. Future investigations leveraging richer, more continuous datasets could unpack further nuances in the interplay between zombie firms and labor mobility, potentially offering even more actionable insights.
The paper’s novel perspective reshapes the discourse on urban labor markets by framing zombie firms not merely as economic anomalies but as active agents influencing the migration decisions of diverse labor groups. This reconceptualization invites a broader reconsideration of labor market policies within the context of industrial and environmental reforms. Beyond economic efficiency, addressing the zombie firm phenomenon may be pivotal in fostering equitable labor market outcomes and curbing regional labor polarization.
Given China’s demographic context, with an aging population and shifting urbanization trends, the implications transcend academic curiosity and enter the realm of urgent policy action. As cities vie for talent to sustain their economic trajectories, understanding and mitigating factors that repel labor is critical. This research puts zombie firm prevalence front and center among those factors, offering policymakers both diagnosis and prescription grounded in rigorous empirical work.
In conclusion, the persistence of zombie firms in Chinese cities represents a multifaceted challenge that undermines urban economic dynamism, environmental quality, and labor market vitality. Addressing this problem demands coordinated policy efforts that integrate market-driven firm exit strategies, industrial upgrading, environmental sustainability, and institutional reforms to facilitate the free flow of resources. Only through such comprehensive approaches can cities hope to enhance their attractiveness to labor, foster sustainable growth, and secure their positions in an increasingly competitive global economy.
Subject of Research: The impact of zombie firms on labor mobility and urban economic dynamics in Chinese cities.
Article Title: How do zombie firms affect labor mobility: city-level empirical evidence from China.
Article References:
Sheng, L., Zhang, X. & Hong, N. How do zombie firms affect labor mobility: city-level empirical evidence from China.
Humanit Soc Sci Commun 12, 1350 (2025). https://doi.org/10.1057/s41599-025-05711-0
Image Credits: AI Generated
