Minimum Wages and Firm Employment: Evidence from China

59 Pages Posted: 22 Apr 2014

See all articles by Yi Huang

Yi Huang

Graduate Institute of International and Development Studies

Prakash Loungani

International Monetary Fund (IMF)

Gewei Wang

The Chinese University of Hong Kong (CUHK)

Date Written: April 16, 2014

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.

Keywords: China, employment, minimum wages, heterogeneous effect

JEL Classification: J24, J31, O14, F10, F14

Suggested Citation

Huang, Yi and Loungani, Prakash and Wang, Gewei, Minimum Wages and Firm Employment: Evidence from China (April 16, 2014). Available at SSRN: https://ssrn.com/abstract=2427606 or http://dx.doi.org/10.2139/ssrn.2427606

Yi Huang (Contact Author)

Graduate Institute of International and Development Studies ( email )

PO Box 136
Geneva, CH-1211
Switzerland

Prakash Loungani

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-7043 (Phone)
202-623-4740 (Fax)

Gewei Wang

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

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