Minimum Wages and Firm Employment: Evidence from China
54 Pages Posted: 15 Dec 2014
Date Written: September 15, 2014
This paper provides the first systematic study of how minimum wage policies in China affect firm employment over the period 2001-07. Using a novel administrative dataset of minimum wage regulations across more than 2,800 counties matched with countrywide firm-level data, we investigate both the effect of the minimum wage and its regulation reform started from 2004. A dynamic panel estimator is combined with a neighbor-pairs approach to control for unobservable heterogeneity common to border counties. We show that minimum wage increases have a significant negative impact on employment on an annual basis, with an estimated employment elasticity of -0.116. By contrast, the employment response to minimum wage hikes was minuscule before 2004. In addition, we find a heterogeneous effect of the minimum wage on employment that depends on the firm's wage level. Specifically, the minimum wage has a larger negative impact on employment in low-wage firms than in high-wage firms. We explore labor market competition as a potential explanation of this heterogeneity. Our results are robust for sample attrition checks and spillover tests.
Keywords: China, Employment, Minimum Wages
JEL Classification: J24; J31; O14; F10; F14
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