Minimum Wages, Firm Size Distribution, and the Labor Share

The sustained decline of the labor share challenges the classic Kaldor facts. This paper proposes a “weighting effect†mechanism: because large firms systematically adopt more capital-intensive technologies, a shift of economic activity toward large firms mechanically depresses the macro labor share, even under perfect competition. We test this mechanism by exploiting minimum wage hikes in China as an exogenous shock that forces small labor-intensive firms to exit. Using the Chinese Annual Survey of Industrial Firms (1998–2007) and a Bartik instrument based on pre-sample small-firm shares interacted with provincial minimum wage growth, we find that a one-standard-deviation shock reduces the market-level labor share by approximately 0.11 percentage points (3.5% of the mean). The effect is robust to controlling for market concentration, alternative measures, and a battery of placebo tests including randomization inference. Direct mechanism tests confirm that the shock raises exit rates, reduces the number and share of small firms, and reallocates output toward large, capital-intensive firms. Supplementary IV estimates confirm that a more equal firm size distribution raises the labor share. The findings identify a complete causal chain from labor market institutions to macro distribution through the firm size structure, offering a “technology-structure†channel that is independent of market power. JEL classification numbers: J31, L11.