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

See all articles by Heng Geng

Heng Geng

Victoria University of Wellington

Yi Huang

Graduate Institute of International and Development Studies

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Sibo Liu

The University of Hong Kong, Faculty of Business and Economics

Date Written: August 30, 2019

Abstract

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

Suggested Citation

Geng, Heng and Huang, Yi and Lin, Chen and Liu, Sibo, How Do Chinese Firms Respond to Rising Labor Costs? Minimum Wage Hikes and Capital Investment (August 30, 2019). Available at SSRN: https://ssrn.com/abstract=3054453 or http://dx.doi.org/10.2139/ssrn.3054453

Heng Geng

Victoria University of Wellington ( email )

PO Box 600
Wellington, 6140
New Zealand

Yi Huang (Contact Author)

Graduate Institute of International and Development Studies ( email )

PO Box 136
Geneva, CH-1211
Switzerland

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Sibo Liu

The University of Hong Kong, Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
Hong Kong

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