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

Harald Hau (), Yi Huang () and Gewei Wang ()
Additional contact information
Yi Huang: Graduate Institute of International and Development Studies
Gewei Wang: Graduate Institute of International and Development Studies

No 08-2016, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

Abstract: The large regional variation of minimum wage changes in 2002—08 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 in low-wage firms, reduce employment growth, but also 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 governance or management practice, but is difficult to reconcile with the idea that competitive pressure is a substitute for governance quality.

Keywords: Firm productivity; capital investment; minimum wage policy (search for similar items in EconPapers)
JEL-codes: D24 G31 J24 J31 O14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cna, nep-lma and nep-tra
Date: 2016-07
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