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

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  • Harald Hau
  • Yi Huang
  • Gewei Wang

Abstract

The large regional variation in minimum wage levels in the period 2002-08 in China 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, reduce employment growth and 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 management practices, and suggests that management quality and competitive pressure are complementary.

Suggested Citation

  • Harald Hau & Yi Huang & Gewei Wang, 2017. "Firm Response to Competitive Shocks: Evidence from China's Minimum Wage Policy," CESifo Working Paper Series 6637, CESifo.
    • Handle: RePEc:ces:ceswps:_6637
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    References listed on IDEAS

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    Cited by:

    1. Peter Harasztosi & Attila Lindner, 2019. "Who Pays for the Minimum Wage?," American Economic Review, American Economic Association, vol. 109(8), pages 2693-2727, August.
    2. Dosi, Giovanni & Virgillito, Maria Enrica & Yu, Xiaodan, 2020. "The wage-productivity nexus in the world factory economy," World Development, Elsevier, vol. 129(C).
    3. 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.
    4. Fan, Haichao & Lin, Faqin & Tang, Lixin, 2018. "Minimum Wage and Outward FDI from China," Journal of Development Economics, Elsevier, vol. 135(C), pages 1-19.

    More about this item

    Keywords

    firm productivity; capital investment; minimum wage policy;

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • 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

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