Estimating the effect of minimum wage on firm profitability in China

Quheng Deng

Economic and Political Studies, 2017, vol. 5, issue 3, 326-341

Abstract: Using the firm-level panel datasets and hand-collected data on county level minimum wage, this paper estimates the effect of minimum wage on firm profitability. As firms may take time to adjust in response to changes in minimum wage, this paper estimates a dynamic panel model with lagged minimum wage. To capture the heterogeneous effect of minimum wage on profitability, this paper further estimates quantile regression dynamic panel model. The estimation results suggest that the effect on firm profitability of minimum wage in the current year is negative across the whole conditional distribution of profitability and it exhibits an inverted-U shape across conditional quantiles. The effect on profitability of lagged minimum wage is positive at the 5th, 10th, 15th quantiles, negative at the 90th and 95th quantiles, and not significant at other quantiles. Turning to the overall effect on profitability of minimum wage, we find that minimum wage exerts significantly negative effect on profitability at the 5th quantile and quantiles higher than 40th and the absolute value of the effect of minimum wage increases with these quantiles. For other quantiles, the overall effect of minimum wage on profitability is negligible.

Date: 2017
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DOI: 10.1080/20954816.2017.1345168

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