Minimum wages, firms’ capital intensity and the evolution of economic efficiency in China

Abstract

Implementing the minimum wage (M.W.) regime leads to higher barriers to entry and the elimination of inefficient firms. This may be a key factor that affects the efficiency of Chinese firms’ evolution and contributes to macroeconomic growth. Based on Chinese industrial enterprise and district M.W. data, we analyse the impact of China’s M.W. regime on the evolution and behaviour of micro firms and the resulting macroeconomic effects from two aspects: a theoretical model and panel data regression. The results show that the M.W. regime increases firms’ factor productivity significantly but leads to the immobility of incumbents, as it results in lower entry and exit probabilities. Total factor decomposition suggests that a M.W. regime improves regional economic efficiency via the growth effect. In addition, as capital intensity increases, a M.W. regime further boosts the growth in firms’ productivity, but its positive effect on macroeconomic efficiency diminishes. The results help understand the underlying drivers of China’s economic growth and offer important reference significance for rationalising labour policies.