Working Paper No. 41: Shi Li, Haiyuan Wan: The Effect of Minimum Wage Regulation on Wage Growth and Its Distribution in China

Li, Shi; Wan, Haiyuan
Published: 2015/11/7 15:52:43    Updated time: 2015/11/7 15:58:32

Abstract: Using the China Household Income Project survey data, this paper examines the effect of minimum wage regulation on wage growth and wage distribution in China. Moreover, minimum wage's heterogeneous effects on different population groups are also investigated across different industries and ownerships. In general, our evidence empirically supports the view that the minimum wage creates a substitute effect for the low-paid workers, as they experience a small wage growth under the cost of more unemployment. Meanwhile, the wages of workers that slightly higher than the minimum pay before are pushed up by the increase in demand because of the ripple effect, so the wage level for the slightly high-paid workers before grows more than the low-paid groups.
Keywords: Minimum wage; Substitute effect; Ripple effect; Wage growth; Wage distribution

 Authors:

        Li, Shi ---- China Institute for Income Distribution;

        Wan, Haiyuan ---- Institute of Social Studies, National Development and Reform Commission, China

 

1 Introduction

 Since the mid-1980s, the overall income inequality in China increased all thetime with a stable trend (Khan and Riskin, 2005). Drawing on analysis based on thehousehold survey data and aggregate data from official sources, many economistsattributed the increasing inequality in China to different kinds of policies andregulations (Ravallion and Chen, 2007). Furthermore, Chaudhuri and Ravallion (2008)showed that gains from growth have been spread too unevenly because of the labourmarket policies, such as employment protection regulation, labour contract law andminimum wage policies et.al, so that the disadvantaged benefit little from the rapideconomic growth in the past years.

Recently, the Minimum Wage Regulation in the labour market in China wasfurther updated from 2004, which aimed to establish a fixed stable minimum wagegrowth for the disadvantaged workers and to increase the wage level for low-wageworkers. Moreover, the Minimum Wage Regulation has been somewhat more strictlyimplemented than before, and the amount of minimum wage standard has steadily increased annually since the year of 2005. Afterwards, many debates related to theupdated Minimum Wage Regulation aroused, especially its negative effect on theissues in the labour market, as it has long been the interesting problems for laboureconomists in the past decades.

On one hand, the pioneers in the literature, such as Stigler (1946) and so on, haveanalyzed the effect of minimum wage policy on wage distribution in U.S and Europe.Their analysis suggested that the labour regulation could increase the labour cost andthen reduce the labour demand for enterprises. It was confirmed by the research ofBrown (1982), Neumark and Wascher (1995), as the amount of wage for low-skilledworkers would reduce 1-3% because of 10% increase of minimum wage. However,on the other hand, many economists such as Card and Krueger (1994) highlighted thepositive effect of labour regulations on wage distribution for low-paid workers, theybelieved that the enterprises could reduce the inspection cost and signal screen costaccording to the efficiency wage. Therefore, in perspective of theoretical andempirical results above, we argue that the effect of the minimum wage policy on wagedistribution is mixed in U.S and Europe countries.

Regarding the minimum wage in China, its effect on wage distribution is still nottoo much documented in China, while the existing literature gets absolutely contraryresults. Zhang and Gao (2009) showed that the wage distribution was improved aslow skilled workers' wage increased a lot. However, Ding (2010) demonstrated thatthe low-wage enterprises suffered a much larger attack from the new minimum wagepolicy in the short turn, so the labour demand and then the wage level for low-paidworkers was reduced. Generally, the existing literature agrees on the argument thatminimum wage policy affect individuals' wage, but the question of who benefits moreremains unclear. In other words, the impact of minimum wage policy on wagedistribution is still ambiguous (Ma et.al, 2012). This is why evidence-based researchesare critical on getting the effect of minimum wages, so as to fix a more appropriateminimum pay to ensure the achievement of the policy goals without compromising onlabour market and economic outcomes.

Therefore, in this paper, we will empirically investigate the contribution ofminimum wage policy to wage growth and wage distribution in China. Compared toother empirical research related to minimum wage policy in China, we have manyadvantages. First, few paper devotes to empirically analyzing minimum wage'simpact on wage growth and wage distribution, though the rising income inequality becomes one of the most important issues for China. Second, most of the papers usedthe macro or aggregate dataset to investigate the effect of minimum wage on labourmarket issues, such as Zhang and Gao (2009). However, our paper uses themicroeconomic data set so that to incorporate individual's reaction for the increasedminimum pay during the analysis.

The structure of this paper is as follows. Section 2 proposes a literature review.Section 3 gives a brief introduction of the minimum wage policy in China. Section 4gives the empirical identification strategy. Section 5 will give some data descriptionand sample statistical analysis. Section 6 shows the empirical results about the effectof minimum pay on wage growth. Section 7 is the robustness check using differentvariable definitions and samples. Section 8 distinguishes the heterogeneous impacts ofthe minimum wage on different population groups. Section 9 is a summary of theresults.