Improving or Disappearing: Firm-Level Adjustments to Minimum Wages in China

Florian Mayneris, Sandra Poncet () and Tao Zhang ()
Additional contact information
Tao Zhang: Shanghai University of International Business and Economics

No 2016027, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: We here consider how Chinese firms react to higher minimum wages, exploiting the 2004 minimum-wage Reform in China. After this reform, we find that the wage costs for surviving firms that were more exposed to minimum wage hikes rose, but their employment and profitability were not affected. This came about due to significant productivity gains among surviving exposed firms. Our results are robust to pre-trend analysis and an IV strategy. However, the survival probability of firms most exposed to minimum-wage hikes fell after the Reform. Firm-level productivity gains partly came from better inventory management and greater investment in capital, at the cost of a reduction in firm-level cash flow. We show that competing explanations are unlikely. In particular, there is no evidence of lower fringe benefits compensating for higher wages, the substitution of less-paid/less-protected migrants for incumbent workers, or firm-level adjustment through higher prices instead of higher productivity. This firm-level productivity adjustment to the minimum wage might be particularly relevant for developing countries where inefficiencies are still pervasive.

Keywords: minimum wages; firm-level performance; productivity; China (search for similar items in EconPapers)
JEL-codes: J38 O12 O14 (search for similar items in EconPapers)
Pages: 41
Date: 2016-11-30
New Economics Papers: this item is included in nep-bec, nep-cna, nep-lma and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Improving or disappearing: Firm-level adjustments to minimum wages in China (2018)
Working Paper: Improving or disappearing: Firm-level adjustments to minimum wages in China (2018)
Working Paper: Improving or disappearing: Firm-level adjustments to minimum wages in China (2018)
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