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This paper examines the causal effect of land use policy on employment growth in Chinese cities. We find that a stricter Floor Area Ratio Regulation (FARR) leads to a reduction in employment growth in Chinese cities-a one percentage point reduction in FARR leads to a concurrent reduction of employment growth by 1.0–1.5 percentage points. More populated cities and labour-intensive manufacturing industries are found to be more severely affected by stricter FARR. Moreover, the effect of a stricter FARR is found to be less pronounced on state-owned firms compared to foreign-owned and privately-owned firms. Our main conclusions are robust to a variety of sensitivity tests, different instruments and alternative estimators. They suggest that imposing a stricter legal FARR incurs considerable employment costs for Chinese cities. [ABSTRACT FROM AUTHOR]