MINIMUM WAGE IMPACTS IN CHINA: ESTIMATES FROM A PRESPECIFIED RESEARCH DESIGN, 2000-2007

Abstract

I. INTRODUCTION Issues associated with minimum wages are generating heated debate in China. Supporters argue that in the transition to a market economy, minimum wages can serve an important safety-net role by providing a minimum floor on wages, thereby protecting otherwise vulnerable workers from the most egregious aspects of intensively competitive markets (Sun 2006; Zhang 2007; Zhang and Deng 2005). This is especially the case for the large influx of rural migrant workers coming from the countryside to the city, both from within the province and from other provinces. Furthermore, the higher labor cost may foster managerial efficiency and labor productivity and induce employers to move up the value-added chain and invest in productivity improving technology (Cooke 2005). From these lines of argument, Chinese scholars have often argued in favor of the more proactive use of minimum wages, which they often regard as otherwise too low and ineffective (Han and Wei 2005). In contrast, opponents of minimum wage laws argue that they inhibit the transition to a market economy by interfering with China's comparative advantage based on an abundance of low-wage labor. Such regulations raise costs and inhibit the growth in demand for Chinese products and hence in the derived demand for their labor. Such growth would otherwise increase both employment and wages. Opponents reiterate the basic arguments against minimum wage legislation in that it will reduce the employment opportunities of low-wage labor and also lead to offsets in such forms as reductions in other elements of the compensation package (Gong 2009; Chen 2001; Xue 2001; Ye 2005). This argument is part-and-parcel of the broader argument that artificially raising wages can jeopardize the growth process that by itself will foster increases in the demand for labor and hence foster higher wages and improved labor standards in general. (1) China's experience with minimum wages is new, having first introduced them in 1993. As discussed subsequently, however, minimum wages have been altered many times since then such that they can be regarded as a potentially important policy instrument. In spite of this importance, there are very few empirical studies on the effects of minimum wages in China (Luo 2007a, 2007b; Shi 2009) and only one study in English (unpublished) to our knowledge (Ni, Wang, and Yao 2008). This is part of the more general gap of a lack of evidence on labor markets in developing countries (Hamermesh 2002)--evidence that could otherwise facilitate critical evidence-based policy making. This is particularly important in the minimum wage area because minimum wages are obviously subject to policy control and manipulation, and in countries such as China, they are an integral part of the transition to a market economy. The purpose of this article is to begin to fill that gap by providing evidence of the impact of minimum wages in China. We do so using the novel methodology of a prespecified research design (Levine 2001; Neumark 2001) based on data that provide a large number of minimum wage changes from which to identify the effects of minimum wages. The article is structured as follows. Section II discusses the theoretically expected impact of minimum wages and Section III outlines the existing empirical evidence from the literature in both developed and developing countries. Section IV provides details on minimum wage legislation and its implementation in China. Section V outlines the methodology of the prespecified research design and provides the estimating equation, while Section VI outlines the data. The empirical results are presented in Section VII, and Section VIII provides a concluding summary. II. EXPECTED IMPACT (2) Unlike the empirical evidence that is controversial (discussed subsequently), the theoretically expected impact of minimum wage legislation is well established in the literature. …