August 25, 2020. Shanghai – A recent study undertaken by CEIBS faculty may for the first time reveal a clear link between macroeconomic policy and individual employee behaviour.

A detailed analysis of China’s 2018 income tax adjustment policy shows strong evidence of its positive effect on individual workers at a micro level, using a dataset much stronger and more comprehensive than what has typically been available in similar studies.

The research, carried out by CEIBS professors Fang Yu and Yi Xiang and Shanghai NYU’s Yuxin Chen, focused on the performance of sales staff at a fashion chain with over 9,000 stores across China.

In October 2018, China increased its standard income tax threshold to RMB 5,000, from RMB 3,500 – meaning those earning under 5,000 would no longer pay any tax.

This increase was effectively a tax cut across the whole country, intended to stimulate the economy and encourage individuals to work more.

“The typical assumption is that income tax cuts grant consumers more cash in hand thus allowing them to spend more or save more. Most income tax policies are intended to stimulate demand,” explains Prof. Xiang.

However, an in-depth micro-level study into the fashion firm’s staff performance data identified detailed behavioural and outcome-related changes brought by the tax threshold increase.

Typically, the impact of such macro policies are difficult to quantify, and the effects virtually impossible to measure due to the endless complexity of the individual circumstances of the millions who make up the labour market.

However, due to the purity and volume of the data analysed, the researchers managed to identify various positive effects that demonstrated that the tax policy works as intended.

This was made possible by the nature of the researchers’ dataset – in particular, due to the fact that the subjects were all sales staff employed at one individual company. Due to the large size of the dataset, the fact that everyone did the exact same job, and the completeness of information, including salary, hours worked, attendance records and sales performance, strong evidence of the policy change’s impact could be seen.

By comparing staff records before and after the new policy was implemented, those who typically had earned less than 3,500 RMB showed no change in their behaviour, as their take home pay was not affected by the tax threshold increase – these employees formed a control group for the researchers.

Conversely, looking at the records of those who earned more than 3,500 RMB, the analysis found salespersons worked harder in the same number of working hours, suggesting a productivity gain, even though monthly salary gains were modest.

The results showed sales persons changed their behaviour in various ways, such as increased attendance (e.g., by not taking sick leave and being more punctual).

The study also found employees with higher salaries were more likely to be motivated by the tax cut due to the knowledge that incentive payments – such as sales commissions – would not be taxed, leading them to pursue sales opportunities more vigorously, which in turn led to higher sales figures.

Other findings included the observation that less skilled sales persons tended to put extra effort into behavioural related performance measures such as attendance and voluntary activities, rather than outcome-based activities such as selling.

The analysis also found that people in poorer regions of China were more motivated by the policy change, and the gains in sales and their incentive pay were higher than those from more affluent areas.

“We found people worked much harder because they could make more than they used to,” says Prof. Xiang, adding, “How can we motivate salespersons? They make 2,000-3,000 RMB a month, so 50 RMB extra is a lot to them.”

Furthermore, the study found that sales performance increases were due to the fact that staff members’ roles were dependent on both a willingness to work and their attitude, unlike jobs with more strictly defined output which must be completed within a certain time (as would be the case for factory workers).

Commenting on the innovative nature of the study, Prof. Xiang says, “Usually income tax affects the demand side, but we have also found this policy affected the supply side of how things worked – this is very unique. There are studies which look at tax policy impact on higher incomes, but the majority of the income in the world is earned by ordinary people, so the implications of this study could be very significant globally.”

“The real value of this study is for policymakers – it is very difficult to measure the impact of such policies on a micro level,” Prof. Fang Yu adds. “Typically, the only indicators we can use to tell if a policy is working or not are macro ones such as GDP, but there countless other factors which impact those so they don't give a strong indication one way or another, but we believe our study has managed to isolate the effect on employee behaviour and demonstrate that, for people who now no longer have to pay tax due to the threshold increase, they work harder and in a more effective way.”