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Improving or Disappearing: Firm-Level Adjustments to Minimum Wages in China

Author

Listed:
  • Florian Mayneris

    () (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and Center for Operations Research and Econometrics (CORE))

  • Sandra Poncet

    () (Paris School of Economics (University of Paris 1), CEPII and FERDI)

  • Tao Zhang

    () (Shanghai University of International Business and Economics)

Abstract

We here consider how Chinese firms react to higher minimum wages, exploiting the 2004 minimum-wage Reform in China. After this reform, we find that the wage costs for surviving firms that were more exposed to minimum wage hikes rose, but their employment and profitability were not affected. This came about due to significant productivity gains among surviving exposed firms. Our results are robust to pre-trend analysis and an IV strategy. However, the survival probability of firms most exposed to minimum-wage hikes fell after the Reform. Firm-level productivity gains partly came from better inventory management and greater investment in capital, at the cost of a reduction in firm-level cash flow. We show that competing explanations are unlikely. In particular, there is no evidence of lower fringe benefits compensating for higher wages, the substitution of less-paid/less-protected migrants for incumbent workers, or firm-level adjustment through higher prices instead of higher productivity. This firm-level productivity adjustment to the minimum wage might be particularly relevant for developing countries where inefficiencies are still pervasive.

Suggested Citation

  • Florian Mayneris & Sandra Poncet & Tao Zhang, 2016. "Improving or Disappearing: Firm-Level Adjustments to Minimum Wages in China," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2016027, Universit√© catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  • Handle: RePEc:ctl:louvir:2016027
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    File URL: http://sites.uclouvain.be/econ/DP/IRES/2016027.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    minimum wages; firm-level performance; productivity; China;

    JEL classification:

    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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