CIIDWPNo.46-MaXinXin-The Effects of Minimum Wage on Wage Distribution in Urban China
Ma, Xinxin; Li, Shi
Published: 2016/5/26 14:07:18    Updated time: 2016/5/26 14:42:20
Abstract: Using CHIP (Chinese Household Income Project) survey data, this study analyzes the effects of minimum wage (MW) policy on wage distribution in urban China from 1993 to2013. Several major conclusions emerged from this study. First, the MW levels affected both the average wage and wage levels for low-wage groups in these three periods: 1993–1995, 1998–2002, and 2007–2013. However, the MW level increases affected the wage levels positively for the low-wage group in only one period: 2007–2013. Second, MW levels have spillover effects, but the spillover effect was not visible during the three periods, despite changes in MW level range. Third, the results by the DID methods indicated that the effect of MW on the low-wage group was greater in the 2007–2013 period, but these effects were limited in the other two periods. Moreover, the spillover effects were proofed in the three periods by DID analysis.
Keywords: minimum wage policy; wage distribution; urban China


        Ma, Xinxin--------Institute of Economic Research, Hitotsubashi University, Japan

        Li, Shi--------Beijing Normal University, China


1 Introduction

The rationale behind minimum wage (MW) policy is to increase the wagelevel for low-income group reduce their poverty level and narrow incomeinequality between high-wage group and low-wage group. Thus, the MWimplementation is an important labor policy in both developing and developedcountries.

In China, income inequality increased during the economic transitionperiod. Along with marketization reform progress, the Chinese governmentalso implemented the Minimum Wage Policy. This policy addressed “marketfailure” caused by firms that set lower than equilibrium wages. MW was firstpromulgated as a law—Enterprise’s Minimum Wage Regulations—in 1993.The MW level is determined by the regional government, the union, and therepresentatives of companies. However, in reality, the regional governmentsdetermine primarily the MW levels. Hence, MW implementation situationsare different across the regions. In 2004, the government published a new MWpolicy to enforce the implementation of MW in whole of China; therefore,there was a large increase in MW level. Based on the new MW policy, theMW level is adjusted once every one or two years, according to many factors―such as the lowest regional living cost, consumer price index of urbanresidents, social insurance, housing fund that individual workers are paid,regional average wage level, status of economic development, andemployment status. The local government (province or city government)adjusts the MW level; as a result, there are regional disparities in MW levels(Xing and Xu 2016). For example, the MW level is higher in eastern regionsas compared to western and central regions, and the rise within these bands ofthe MW levels is different across regions. These regional disparities allow usto use a quasi-natural experiment model to prove the effects of MW policy onwage distribution.

There are some empirical studies on the effects of MW on employment,wage gaps, and income inequality for developed countries, but hardly anyempirical studies to understand the effects of MW on wage distribution inChina since 1993. In this study, we utilize the Chinese Household IncomeProject survey (CHIPs) data to provide numerical evidence to this issue.

Concretely, this study attempts to answer the following questions throughan empirical analysis using CHIPs data. First, does the MW level affect wagelevel? If it does, is the effect of MW on wage different by wage distribution?Second, does the MW-level change caused by the regional government affectwage level change throughout wage distribution? Third, by addressing theheterogeneity problem, does the MW policy affect wage distribution? Thisstudy uses micro survey data conducted in four periods (1995, 2002, 2007 and2013); hence, a repeated cross-section analysis should investigate any changesin both the above issues. The survey periods from 1995 to 2013 are dividedinto three periods―the MW promulgate period (1993–1995), the MWimplementation period (1998–2002), and the MW enforcement period (2007–2013). Considering that the MW primarily affects low-income groups, weemploy different models to conduct an analysis on both average wage anddifferent wage percentiles. In addition, because CHIP 1995 and CHIP 2002are retrospective data, the incomes information for the previous five years isextrapolated easily. We utilized this information to build panel data sets andperform detailed analysis. These analyses are the first challenge for the issuesusing CHIP survey data.

This paper is structured as follows. Part II reviews the literature. Part IIIdescribes analysis methods, including introduction to models and data. Part IVstates the analysis results. The last part presents the main conclusions.


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