Firm Response to Competitive Shocks: Evidence from China's Minimum Wage Policy

58 Pages Posted: 21 Sep 2017

See all articles by Harald Hau

Harald Hau

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Yi Huang

Graduate Institute of International and Development Studies

Gewei Wang

Graduate Institute of International and Development Studies (IHEID)

Date Written: August 2017

Abstract

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: D240, G310, J240, J310, O140

Suggested Citation

Hau, Harald and Huang, Yi and Wang, Gewei, Firm Response to Competitive Shocks: Evidence from China's Minimum Wage Policy (August 2017). CESifo Working Paper Series No. 6637, Available at SSRN: https://ssrn.com/abstract=3039920

Harald Hau (Contact Author)

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland

Swiss Finance Institute

Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Yi Huang

Graduate Institute of International and Development Studies ( email )

PO Box 136
Geneva, CH-1211
Switzerland

Gewei Wang

Graduate Institute of International and Development Studies (IHEID) ( email )

PO Box 136
Geneva, CH-1211
Switzerland

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