The Impact of Minimum Wage Regulation on the Share of Labor Income in Enterprises: Theoretical Analysis and Microscopic Evidence

Abstract

The minimum wage regulation aims to safeguard the legitimate rights and interests of workers in obtaining labor remuneration, which will inevitably affect the wage rate of enterprises and thus affect the distribution of factor income within enterprises. The theoretical model of this paper shows that the wage rate effect of the minimum wage regulation promotes enterprises to change the mode of factor distribution （capital-labor exchange）, leading to the increase of enterprise capital intensity, and thus the share of labor income will decline. Using the minimum wage standards of more than 2600 districts and counties in China and the data of industrial enterprises （1998-2013）, the empirical research confirms the theoretical expectation: （1）The regulation of minimum wage significantly reduces the share of labor income of enterprises. Specifically, every 10% increase of minimum wage will significantly reduce the share of labor income by 1.43 percentage points; （2）The regulation of minimum wage has the effect of wage rate and labor productivity, but the smaller effect of wage rate makes the share of labor income decrease; （3）Capital intensity is an important mechanism for minimum wage to affect the share of labor income. This paper is helpful to understand the impact of the minimum wage regulation on the behavior of enterprises in China and to provide beneficial policy enlightenment for improving the pattern of primary income distribution in China.