Minimum Wages, Spillovers and the Unconditional Wage Distribution in Urban China: Do Ethnic Minorities Benefit?

Abstract

This paper examines minimum wage effects on workers’ wages in China’s ethnic minority urban areas using publicly available minimum wage data combined with proprietary household data. The identification strategy relies on a recent estimator developed in Powell (2015) capable of studying the minimum wage effects on the unconditional wage distribution in an instrument variable (IV) setting. The results show that minimum wage effects lead to wage compression at both the lower and upper parts of the unconditional wage distribution, although the extent to which wages are affected varies quite substantially for Han and ethnic minority workers. At the bottom part of the distribution, minimum wages increase wages for both Han and ethnic minority workers, although the size of the effect is larger for the latter group, implying a reduction in the ethnic wage gap for lower-wage workers. Conversely, at the upper part of the distribution, higher minimum wages reduce wages for Han workers despite failing to have any statistically significant effect on ethnic minority workers. The results imply that employers react to the higher labor costs associated with minimum wages by constraining the wages for higher paid Han, but not ethnic minority, workers.