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

Author

Listed:
  • Harald Hau

    (University of Geneva, Swiss Finance Institute, Centre for Economic Policy Research (CEPR), and CESifo (Center for Economic Studies and Ifo Institute))

  • Yi Huang

    (Graduate Institute of International and Development Studies)

  • Gewei Wang

    (Graduate Institute of International and Development Studies (IHEID))

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.

Suggested Citation

  • Harald Hau & Yi Huang & Gewei Wang, 2016. "Firm Response to Competitive Shocks: Evidence from China’s Minimum Wage Policy," Swiss Finance Institute Research Paper Series 16-47, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1647
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    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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