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Minimum Wage and Firm Employment: Evidence from China

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This paper studies how minimum wage policies affect firm employment in China using a unique county level minimum wage data set matched to disaggregated firm survey data. We investigate both the effect of imposing a minimum wage, and the effect of the policies that tightened enforcement in 2004. We find that the average effect of minimum wage changes is modest and positive, and that there is a detectable effect after enforcement reform. Firms have heterogeneous responses to minimum wage changes which can be accounted for by differences in their wage levels and profit margins: firms with high wages or large profit margin increase employment, while those with low wages or small profit margin downsize. The increase in enforcement of China’s minimum wage in 2004 has since amplified this heterogeneity, which implies that labor regulation may reduce the monopsony rent of firms.Our results provide evidence for the theoretical predictions of the positive minimum wage-employment relationship in a monopolistic labor market.

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  • Yi Huang & Prakash Loungani & Gewei Wang & Prakash Loungani & Gewei Wang, 2014. "Minimum Wage and Firm Employment: Evidence from China," IHEID Working Papers 08-2014, Economics Section, The Graduate Institute of International Studies.
    • Handle: RePEc:gii:giihei:heidwp08-2014
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    More about this item

    Keywords

    China; employment; minimum wages; heterogeneous effect;
    All these keywords.

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • F10 - International Economics - - Trade - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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