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MINIMUM WAGE AND FIRM EMPLOYMENT: EVIDENCE FROM CHINA


Coordinators: Prof. Yi Huang (CFD), Dr. Prakash Loungani (Advisor, IMF Research Department) and Dr. Gewei Wang (Chinese University of Hong Kong)

This paper provides the first systematic study of how minimum wage policies in China affect firm employment over the period 2001–07. Using a novel administrative dataset of minimum wage regulations across more than 2,800 counties matched with countrywide firm-level data, we investigate both the effect of the minimum wage and its regulation reform started from 2004. A dynamic panel estimator is combined with a neighbour-pairs approach to control for unobservable heterogeneity common to border counties. We show that minimum wage increases have a significant negative impact on employment on an annual basis, with an estimated employment elasticity of -0.116. By contrast, the employment response to minimum wage hikes was minuscule before 2004. In addition, we find a heterogeneous effect of the minimum wage on employment that depends on the firm’s wage level. Specifically, the minimum wage has a larger negative impact on employment in low-wage firms than in high-wage firms. We explore labour market competition as a potential explanation of this heterogeneity. Our results are robust for sample attrition checks and spillover tests.

 
Working Paper
     
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Minimum Wages and Firm Employment: Evidence from China 

Yi Huang, Prakash Loungani & Gewei Wang, CFD WP 2014