Yi Huang, The Graduate Institute Geneva; Prakash Loungani, International Monetary Fund; and Gewei Wang, Chinese University of Hong Kong

 How do Firms React to Minimum Wage Changes?
 

This paper provides the first systematic study of how minimum wage policies in China affected firm employment over the 2001–06 period. Using a novel administrative dataset of minimum wage regulations across more than 2,800 counties matched with firm and household data,Huang, Loungani, and Wang find that minimum wage hikes have significantly negative effects on employment. The researchers investigate the heterogeneous effect of the minimum wage on firm employment in terms of firm, industry, spatial characteristics, and labor market conditions. They show that employment falls more in response to minimum wage hikes in lower-wage firms with lower profit margins. The same is true for firms in labor-intensive industries and in labor markets with high mobility. Furthermore, a major reform in the minimum wage policy was conducted by the central government around 2004. They find that the response of firm employment growth to minimum wage hikes has become larger compared with the pre-reform period. Similar results hold for the numerous specifications and robustness checks with the attrition, implementation, and placebo tests.