Minimum Wages and Firm Employment: Evidence from China

54 Pages Posted: 15 Dec 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: September 15, 2014

Abstract

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

Suggested Citation

Huang, Yi and Loungani, Prakash and Wang, Gewei, Minimum Wages and Firm Employment: Evidence from China (September 15, 2014). Available at SSRN: https://ssrn.com/abstract=2537795 or http://dx.doi.org/10.2139/ssrn.2537795

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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