How Do Chinese Firms Respond to Rising Labor Costs? Minimum Wage Hikes and Capital Investment
60 Pages Posted: 17 Oct 2017 Last revised: 5 Sep 2019
Date Written: August 30, 2019
This paper studies how minimum wage (MW) policies affect capital investment using the industrial census of manufacturing firms in China, where MW policies vary across counties. Exploiting MW policy discontinuities at county borders, we show that firms increase capital investment, machine imports, and patent outputs following MW hikes. The investment response to MW hikes is stronger for firms that are labor-intensive, that have more room for technological improvement, and that cannot sufficiently pass on labor costs to consumers. A natural experiment based on county jurisdictional changes further assures the causal relationship.
Keywords: Minimum Wage, Investment, Capital-labor Substitution, Innovation
JEL Classification: G31, J3
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