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Trade and Minimum Wages in General Equilibrium: Theory and Evidence

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  • Xue Bai
  • Arpita Chatterjee
  • Kala Krishna
  • Hong Ma

Abstract

This paper develops a new model with heterogeneous firms under perfect competition in a Heckscher-Ohlin setting. We derive a novel prediction regarding the effect of minimum wages on selection, namely that a binding minimum wage will raise (or lower) TFP at the firm and industry level depending on whether the capital intensity of entry costs exceeds (falls short of) that of production. Exploiting rich regional variation in minimum wages across Chinese counties and using firm level production data, we find robust evidence in support of causal effects of minimum wages consistent with our theoretical predictions.

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  • Xue Bai & Arpita Chatterjee & Kala Krishna & Hong Ma, 2018. "Trade and Minimum Wages in General Equilibrium: Theory and Evidence," NBER Working Papers 24456, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24456
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    2. Wei, Zhihua & Ren, Zerong & Zhu, Caiyun & Zhou, Yisihong & Liu, Xiaowen, 2023. "Minimum wage effects on firms’ R&D investment: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 87(C), pages 287-305.
    3. Pham, Hoang, 2023. "Trade reform, oligopsony, and labor market distortion: Theory and evidence," Journal of International Economics, Elsevier, vol. 144(C).
    4. Angus C. Chu & Haichao Fan & Yuichi Furukawa & Zonglai Kou & Xueyue Liu, 2021. "Minimum Wages, Import Status, And Firms' Innovation: Theory And Evidence From China," Economic Inquiry, Western Economic Association International, vol. 59(1), pages 441-458, January.
    5. Chi‐Chur Chao & Mong Shan Ee & Xuan Nguyen & Eden S. H. Yu, 2022. "Minimum wage, firm dynamics, and wage inequality: Theory and evidence​," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(3), pages 247-271, September.
    6. Huang, Yi & Sheng, Liugang & Wang, Gewei, 2021. "How did rising labor costs erode China’s global advantage?," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 632-653.

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