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The cleansing effect of minimum wage : Minimum wage rules, firm dynamics and aggregate productivity in China

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  • Sandra Poncet
  • Florian Mayneris
  • Tao Zhang

Abstract

We study how the 2004 reform of minimum wage rules in China has affected the survival, average wage, employment and productivity of local firms. To identify the causal effect of minimum wage growth, we use firm-level data for more than 160,000 manufacturing firms active in 2003 and complement the triple difference estimates with an IV strategy that builds on the institutional features of the 2004 reform. We find that the increase in city-level minimum wages resulted in lower survival probability for firms that were the most exposed to the reform. For surviving firms, wage costs increased without negative repercussions on employment. The main explanation for this finding is that productivity significantly improved, allowing firms to absorb the cost shock without hurting their employment nor their profitability. At the city-level, our results show that higher minimum wages fostered aggregate productivity growth thanks to productivity improvements of incumbent firms and net entry of more productive ones. Hence, in a fast-growing economy like China, there is a cleansing effect of labor market standards. Minimum wage growth allows more productive firms to replace the least productive ones and forces incumbent firms to strengthen their competitiveness, these two mechanisms boosting the aggregate efficiency of the economy.

Suggested Citation

  • Sandra Poncet & Florian Mayneris & Tao Zhang, 2014. "The cleansing effect of minimum wage : Minimum wage rules, firm dynamics and aggregate productivity in China," Working Papers 2014-16, CEPII research center.
  • Handle: RePEc:cii:cepidt:2014-16
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    Cited by:

    1. Howell, Anthony, 2020. "Minimum wage impacts on Han-minority Workers’ wage distribution and inequality in urban china," Journal of Urban Economics, Elsevier, vol. 115(C).
    2. Victor Stolzenburg & Daria Taglioni & Deborah Winkler, 2019. "Economic upgrading through global value chain participation: which policies increase the value-added gains?," Chapters, in: Stefano Ponte & Gary Gereffi & Gale Raj-Reichert (ed.),Handbook on Global Value Chains, chapter 30, pages 483-505, Edward Elgar Publishing.
    3. Lemoine, Françoise & Poncet, Sandra & Ünal, Deniz, 2015. "Spatial rebalancing and industrial convergence in China," China Economic Review, Elsevier, vol. 34(C), pages 39-63.
    4. Christian Dreger & Reinhold Kosfeld & Yanqun Zhang, 2019. "Determining Minimum Wages In China: Do Economic Factors Dominate?," Review of Urban & Regional Development Studies, Wiley Blackwell, vol. 31(1-2), pages 44-59, March.
    5. David Neumark & Luis Felipe Munguia Corella, 2019. "Do Minimum Wages Reduce Employment in Developing Countries? A Survey and Exploration of Conflicting Evidence," NBER Working Papers 26462, National Bureau of Economic Research, Inc.
    6. Clement Imbert & Marlon Seror & Yifan Zhang & Stephan Yanos Zylberberg, 2018. "Migrants and Firms: Evidence from China," Bristol Economics Discussion Papers 19/713, School of Economics, University of Bristol, UK.
    7. Belman, Dale. & Wolfson, Paul J., 2016. "What does the minimum wage do in developing countries? : A review of studies and methodologies," ILO Working Papers 994893283402676, International Labour Organization.
    8. Stijn Broecke & Alessia Forti & Marieke Vandeweyer, 2017. "The effect of minimum wages on employment in emerging economies: a survey and meta-analysis," Oxford Development Studies, Taylor & Francis Journals, vol. 45(3), pages 366-391, July.

    More about this item

    Keywords

    minimum wages; firm-level performance; aggregate TFP; China;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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