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

Abstract

The large regional variation in minimum wage levels during the period 2002–8 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 labour 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 labour cost shocks can be explained by differences in management practices and suggests that management quality and competitive pressure are complementary.

Who Pays for the Minimum Wage?

“…In online Appendix Section A.5.3 we show that the bias from predicting F A i is negligible 12. Most papers in the minimum wage literature do not use weights in firm-level regressions(Machin, Manning, and Rahman 2003;Draca, Machin, and Van Reenen 2011;Hau, Huang, and Wang 2016;Kertesi and Köllő 2004;Mayneris, Poncet, and Zhang 2018). A notable exception isCard and Krueger (1994) who report estimates from regressions using employment weights.…”

“…The differences between non-tradable and tradable sectors are hard to reconcile with models emphasizing the productivity enhancing effect of the minimum wage (Mayneris, Poncet, and Zhang 2018;Riley and Bondibene 2018;Hau, Huang, and Wang 2016) or models relying on monopsony power in labor markets (Bhaskar, Manning, and To 2002;Manning 2003). The common prediction in these models is that firms absorb the minimum wage shock by increasing their total production.…”

“…3 This paper also contributes to the literature investigating margins of adjustment to the minimum wage. Previous literature has examined the effect on firm profitability and revenue (Mayneris, Poncet, and Zhang 2018;Hau, Huang, and Wang 2016;Riley and Bondibene 2018;Draca, Machin, and Van Reenen 2011;Allegretto and Reich 2018), on the stock-market value Krueger 1995, Bell andMachin 2018), on capital stock (Hau, Huang, and Wang 2016), and on output prices in the local service sector (see Lemos 2008 and MaCurdy 2015 for a review). Here we provide a comprehensive study of the different margins adjustment, both across the whole economy and separately by sector.…”

The wage-productivity nexus in the world factory economy

“…Some other studies focus on the reverse causation, from wages to productivity, and look at the effects of minimum wage regulations, as China since 2004 has strongly reinforced the sanctions for not compliant firms. Hau et al (2016) report on the so called cleansing effects of minimum wage. The higher labour costs might have triggered processes of internal restructuring.…”

Do Firms Exit the Formal Economy after a Minimum Wage Hike?: Quasi-Experimental Evidence from Turkey

“…A recent exception is Mayneris et al (2018) which look at the impact of a minimum wage hike on value added, productivity and profits in China. Hau et al (2016) also examined the substitution of labor for capital by Chinese firms in response to the minimum wage, as suggested by Stigler (1946). Borhat at al.…”