Abstract
We present evidence of a connection between bank concentration and labor markdown in China. Using a large dataset on bank branch distribution and firm performance in China, we document that financial friction in the local market leads to significantly higher firm-level labor markdowns but has little impact on firms’ product markup and profitability. This suggests that firms pass the impact of financial friction to the labor market by exploiting labor when faced with higher financial costs. Such transmission of financial friction is more salient among low-skill-intensity or non-state-owned firms, and greater labor mobility facilitates the transmission. Our findings highlight the distributional effect of financial friction in the economy: labor, especially the low-skilled ones, rather than capital, eventually bears the cost of financial friction.