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Minimum Wages and Firm Employment: Evidence from China
Abstract
This paper studies how minimum wage policies affect firm employment in China using a unique county level minimum wage data set matched to disaggregated firm survey data. We investigate both the effect of imposing a minimum wage, and the effect of the policies that tightened enforcement in 2004. We find that the average effect of minimum wage changes is modest and positive, and that there is a detectable effect after enforcement reform. Firms have heterogeneous responses to minimum wage changes which can be accounted for by differences in their wage levels and profit margins: firms with high wages or large profit margin increase employment, while those with low wages or small profit margin downsize. The increase in enforcement of China’s minimum wage in 2004 has since amplified this heterogeneity, which implies that labor regulation may reduce the monopsony rent of firms. Our results provide evidence for the theoretical predictions of the positive minimum wage employment relationship in a monopolistic labor market.
... Moreover, the conditions and development of companies and cities may affect local CO2 emissions, which may have an impact on urban temperature changes (Ang, 2007). Therefore, we refer to Jin et al. (2020) and control the firm-level variables such as firm size (SIZE), asset-liability ratio (LEV), equity concentration (OW) and fixed asset ratio (FIX), as well as city-level variables 1 such as regional population (POPU), regional GDP, industrial pollution control costs (POL) and foreign investment (INV) in the benchmark regression to mitigate endogeneity problems arising 1 It should be noted that since county-level data of industrial pollution control costs and foreign investment are not available, we refer to the existing literature and set all regional control variables at the municipal level (Huang et al., 2014;Feng et al., 2015;Gan et al., 2016;Mo, 2018;Kasahara and Li, 2020). from omitted variables. ...
This paper uses financial data from listed Chinese manufacturing companies, combined with meteorological data, to estimate the microeconomic effects of temperature changes. By constructing seasonal average temperatures, we find that average summer temperatures significantly reduce the financial performance, while average winter, spring, and autumn temperatures do not have a significant effect on the corporate financial performance. We further find that the effect of temperature changes on corporate financial performance is nonlinear through temperature bins variables. Both extreme low temperatures (<-12 °C) and high temperatures (>27 °C) have a negative impact on corporate financial performance. The mechanism tests find that high temperatures not only reduce the labor productivity of firms, but also increase the corporate adaptation actions, leading to increased adaptation costs, crowding out productive funds and causing a capital mismatch. Further heterogeneity analysis confirms that the magnitude of the negative effect of temperature changes is limited by the enterprise nature and the region in which the firm is located. The financial performance of state-owned enterprises, firms in the south and developed regions are more vulnerable to high temperatures. This study provides a policy basis for mitigating the negative effects of temperature changes and provides new empirical evidence for climate governance.
... The authors provide support for the conventional view that minimum wages reduce employment among low-skilled workers and that the low-wage labour market segment can be reasonably well approximated by the neoclassical competitive model. Similar results are obtained by Huang et al. (2014) for China, where the minimum wage is also found to affect employment negatively, particularly in firms with low-wage earners. In contrast, Levin-Waldman and McCarthy (1998) use information from a qualitative survey of small businesses in the USA and find that jobs are not necessarily destroyed, but job creation may be hindered. ...
We study the transmission channels for rises in the minimum wage using a unique firm-level dataset
from eight Central and Eastern European countries. Representative samples of firms in each country
were asked to evaluate the relevance of a wide range of adjustment channels following specific instances
of rises in the minimum wage during the recent post-crisis period. The paper adds to the rest of literature
by presenting the reactions of firms as a combination of strategies, and evaluates the relative importance
of those strategies. Our findings suggest that the most popular adjustment channels are cuts in nonlabour
costs, rises in product prices, and improvements in productivity. Cuts in employment are less
popular and occur mostly through reduced hiring rather than direct layoffs. Our study also provides
evidence of potential spillover effects that rises in the minimum wage can have on firms without
minimum wage workers.
... Mayneris et al. (2015) study exit responses to minimum wage hikes in China. See alsoHuang et al. (2015).7 Similarly,Brochu et al. (2015) emphasize different responses among continuing, beginning, and ending employment matches, which is analogous to our distinctions among continuing, entering, and exiting firms. ...
We document two new findings about the industry-level response to minimum wage hikes. First, restaurant exit and entry both rise following a hike. Second, there is no change in employment among continuing restaurants. We develop a model of industry dynamics based on putty-clay technology that is consistent with these findings. In the model, continuing restaurants cannot change employment, and thus industry-level adjustment occurs gradually through exit of labor-intensive restaurants and entry of capital-intensive restaurants. Interestingly, the putty-clay model matches the small estimated short-run disemployment effect of the minimum wage found in other studies, but produces a larger long-run disemployment effect.
... The study reported aggregate efficiency gains attributed to the reform. Huang, Loungani and Wang (2014) found that firms with higher wages or large profit margins increase employment, while those with low wages or small profit margins will downsize labour input. The net effect of higher minimum wages on employment turns out to be positive. ...
Although labor costs are crucial inputs in corporate production, only little is known about their effects on corporate tax avoidance. Using a large dataset of industrial firms in China, we introduce a geographic information system technique that considers the discontinuities of minimum wage at county borders to identify the causal effect of labor costs on tax avoidance. We present strong evidence that minimum wage hikes significantly reduce the sensitivity of firms’ imputed profits to their reported profits, which indicates that firms improve their tax avoidance activities. Our findings are particularly pronounced for non-state-owned firms, firms with financial constraints, firms with low average wage, firms in industries with high labor intensity, and firms located in regions with high government intervention and low fiscal deficit.
This paper investigates the effects of minimum wage (MW) policies on entrepreneurship by using all contiguous county-pairs in China that straddle prefecture borders. We find that the MW significantly and negatively affects entrepreneurship, and the results are robust to a battery of tests based on different specifications. A plausible mechanism might be the crowd-out effect of increase of labor cost, given that our findings are particularly strong in labor-intensive industries, in areas with higher labor costs or low-level access to finance. Overall, this study highlights the negative effects of minimum wage labor policy on entrepreneurship, which have yet to be fully understood.
Labor costs in China have been increasing dramatically in recent years, spurring worries that the country may lose its comparative advantage in manufacturing and its role as the “World’s Factory”. This paper aims to evaluate the effects of rising labor costs on China’s attractiveness to multinationals and its competitiveness in exports, by using regional variations in minimum wage distortion as possibly exogenous shocks to unskilled-labor costs. We first develop a two-sector model by introducing the minimum wage into a general equilibrium model which integrates production and trade in a multi-regional setting. Consistent with model predictions, we find that rising minimum wage distortion reduces more of the exports in unskilled-labor intensive industries. Moreover, exports by foreign invested firms are more sensitive to changes in minimum wage distortion than exports by domestic firms, and both intensive and extensive margins matter for this distinction.
This study explores the heterogeneous effects of minimum wage on innovation of different types of firms. We develop an open‐economy R&D‐based growth model and obtain the following result: raising the minimum wage reduces innovation of firms that use domestic inputs but increases innovation of firms that import foreign inputs. We test this result using city‐level data on minimum wages and firm‐level patent data in China. In accordance with our theory, we find that raising the minimum wage is associated with more innovation by importing firms and less by non‐importing firms. This result survives a battery of robustness checks. (JEL E24, F43, O31)
For the change-point analysis of a high-dimensional time series, we consider a semiparametric model with dynamic structural break factors. With our model, the observations are described by a few low-dimensional factors with time-invariant loading functions of the covariates. Regarding the structural break, the factors are assumed to be nonstationary and follow a vector autoregression (VAR) process with a change in the parameter values. In addition, to account for the known spatial discrepancies, we introduce discrete loading functions. We study the theoretical properties of the estimates of the loading functions and the factors. Moreover, we provide both the consistency and the asymptotic normality for making an inference on the estimated breakpoint. {Importantly, our results hold for both large and small breaks in the factor dependency structure.} The estimation precision is further illustrated via a simulation study. Finally, we present two empirical applications in modeling the dynamics of the minimum wage policy in China and analyzing a limit order book dataset.
We analyze the determinants of minimum wages in China at the regional level. We include a broad set of economic variables and consider the role of spatial spillovers, which reflect the geographical pattern of regions and can arise for several reasons, including competition between local policymakers. The analysis primarily reveals the existence of strong regional ties in the development of minimum wages. Once these spatial effects are considered, the role of economic variables in the determination of minimum wages declines, and their impact is lower than initially thought. Whereas consumption per capita and consumer prices remain significant, regular wages lose their importance when controlling for reverse causation. Although minimum wage regulation stresses the relevance of economic factors in the determination of appropriate levels, actual development is largely driven by regional dependencies. As minimum wage standards set by local officials do not fully reflect regional economic conditions, further reform should be on the agenda.
Most of the studies have focused on the employment scenario of developed countries with respect to higher minimum wage and only a few related studies have been conducted on emerging and developing countries- where wage rate plays a dominant role.Rama (2004) looked in to the consequence of doubling minimum wage on the economic outcome of Indonesia where it is found that minimum wage led to a two percent decrease in employment and a staggering five percent decrease in investment, which might have led to fall in the level of international competitiveness.
"Understanding labour market dynamics" is the full lecture including explanatory notes that I am teaching as part of the Macro-labour modelling school at the International Training Center in Turin.
It covers state of the art labour market modelling for macro-economists and introduces scholars and researchers into tools to analyse different labour market challenges and policies, such as labour market duality, labour market institutions and minimum wages, among others.
This presentation will be continuously updated to add relevant material as the course develops over time.
By using unique administrative personal income tax data covering the population of a middle‐sized Chinese city from 2009 to 2013, we explore how minimum wage adjustments affect wages of low‐wage workers. The empirical evidence documented in this paper suggests a unique pattern of minimum wage regulation: while it permits wages to stay below the prevailing minimum wage threshold temporarily, it does encourage a higher growth rate for wages below the threshold. Overall, such a pattern might help lessen any downward pressures on employment, while ensuring that low‐wage earners gradually get better off over time. (JEL J3, J6, P5)
China's abundant supply of cheap labor has played an important role in its remarkable economic and social development. Recently, however, China has experienced a labor shortage and rising wages, implying that the country's long‐lasting competitive advantage based on its “unlimited” labor supply and low costs is vanishing. We find that structural demographic changes, regional economic growth disparities and the household registration system may have caused the labor shortage. Furthermore, China's continued low wages, relatively low labor share of gross national income, declining proportion of household consumption to GDP, and productivity improvements as well as increasing unit labor costs can be used to explain the recent wage increases. The dramatic development of its labor market signals that China is entering a new stage of economic development. The country's prior successful model of economic development needs to be adjusted to adapt to the new situation in its labor market to achieve sustainable economic development.
A stable labor market is a policy priority for most countries, especially after the burst of the global financial crisis. Unlike most countries, the labor market in China appears to be holding up well, despite sharp slowdown in economic growth. This paper argues that there are underlying fundamental mechanisms that help explain the resilience of China's labor market. The key to understanding labor market dynamics in China is that rural-to-urban migrant flows are more sensitive to growth than urban workers in the process of fast urbanization, which serves as a main shock absorber to buffer employment against adverse shocks. Therefore, we propose a generalized Okun's Law (GOL) that incorporates migrant flows with unemployment rates to capture the relation between labor market dynamics and economic cycles. The original Okun's Law can be regarded as a special case of the GOL for developed countries that have already completed urbanization. Conducting empirical analysis with both China's national- and city-level data and cross-country panel data, we find strong evidence supporting the GOL theory. Findings in the paper have implications for a deeper understanding of the wisdom of Okun's Law and its application in labor market policies.
The authors assess the critique by Neumark, Salas, and Wascher (2014) of minimum wage studies that found small effects on teen employment. Data from 1979 to 2014 contradict NSW; the authors show that the disemployment suggested by a model assuming parallel trends across U.S. states mostly reflects differential pre-existing trends. A data-driven LASSO procedure that optimally corrects for state trends produces a small employment elasticity (–0.01). Even a highly sparse model rules out substantial disemployment effects, contrary to NSW’s claim that the authors discard too much information. Synthetic controls do place more weight on nearby states—confirming the value of regional controls—and generate an elasticity of −0.04. A similar elasticity (−0.06) obtains from a design comparing contiguous border counties, which the authors show to be good controls. NSW’s preferred matching estimates mix treatment and control units, obtain poor matches, and find the highest employment declines where the relative minimum wage falls. These findings refute NSW’s key claims.
Using both qualitative and quantitative (meta-analysis) methods, this paper reviews the growing evidence on the impact of minimum wages on employment in 14 major emerging economies (Argentina, Brazil, Chile, China, Colombia, India, Indonesia, Mexico, Poland, the Philippines, the Russian Federation, South Africa, Thailand and Turkey). Overall, minimum wages are found to have only a minimal impact on employment, and there is evidence of reporting bias towards statistically significant negative results. More vulnerable groups (e.g. youth and the low-skilled) are marginally more negatively affected, and there is some indication that higher minimum wages lead to more informal employment.
This paper empirically analyzes the impact of Chinese minimum wage regulations on the firm decision to invest in physical and human capital. We exploit the geographical and inter-temporal variations of county-level minimum wages in a panel data set of all state-owned and all above-scale non-state-owned Chinese firms covering the introduction of the new Chinese minimum wage regulations in 2004. In our basic regressions including all Chinese firms, we find significant negative effects of the minimum wage on human capital investment rates and no overall effects on fixed capital investment rates. When grouping firms by their ownership structure, we find that these results hold for most firms. Foreign-owned firms are an exception to some extent, because the likelihood that they invest in human capital has not decreased in response to the policy.
This article draws from the wealth of literature surrounding China's role in global markets. In particular it focuses on the debate regarding China's Lewis turning point and burgeoning market share. This article constructs a theoretical framework surrounding globalisation theory and Richard Freeman's ‘great doubling’ thesis, and assesses the implications of China's reserve-labour surplus for global labour standards. It reviews a wide range of the literature on related topics, assessing the validity of the data therein. Market signals suggesting the depletion of China's reserve-labour surplus are distorted due to state policy known as hukou, which itself may cause China's Lewis turning point to be pushed further into the future. There is evidence that China can catch up with advanced economies in terms of capital intensive production (although they remain some way from doing so) and that China's crowding out of neighbouring economies’ market shares might be seen more accurately as redirection, rather than outright displacement. Finally, this article highlights evidence of a race to the bottom.
It is a common belief that the existence of involuntary unemployment implies that wages are too high and that wage moderation
should be encouraged as a way to keep unemployment down. This paper argues for a reconsideration of this view by showing that
it is possible for a binding minimum wage to reduce unemployment or increase employment even if there is involuntary unemployment.