The higher costs of doing business in China: Minimum wages and firms' export behavior

Abstract

This paper examines the relationship between changes in the minimum wage and firms' export behavior in China using detailed firm-level data of medium and large manufacturing enterprises between 1998 and 2007. We find that a 10% increase in the minimum wage is associated with a 0.9 percentage-points decrease in the probability of exporting goods and a 0.9% decline in export sales, conditional on exporting. These findings are generally robust to alternative estimation methods and data sources. We further observe a larger decline among firms with lower average wages and a lower capital–labor ratio. The results suggest that Chinese exports and comparative advantage in international markets are not negligibly affected by higher local labor costs and regulations measured through raises in minimum wage standards.