Firm Response to Competitive Shocks: Evidence from China’s Minimum Wage Policy
93 Pages Posted: 22 Jul 2016 Last revised: 5 Jul 2019
Date Written: June 16, 2019
The large regional variation in minimum wage levels in the period 2002-08 in China implies that Chinese manufacturing firms experienced competitive shocks as a function of firm location and their low-wage employment share. We find that minimum wage hikes accelerate the input substitution from labor to capital, reduce employment growth and accelerate total factor productivity growth–particularly among the less productive firms under private Chinese or foreign ownership, but not among state-owned enterprises. The heterogeneous firm response to labor cost shocks can be explained by differences in management practices, and suggests that management quality and competitive pressure are complementary.
Keywords: Firm productivity, capital investment, minimum wage policy
JEL Classification: D24, G31, J24, J31, O14
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