How does employment respond to minimum wage adjustment in China?

• Main Authors: Wye, Chung Khain, Abdul Bahri, Elya Nabila
• Format: Article
• Published: SAGE Publications 2021
• Subjects: HB Economic Theory; HD Industries. Land use. Labor
• Online Access: http://eprints.um.edu.my/25919/; https://doi.org/10.1177/1035304620970838
• Institution: Universiti Malaya

Under what circumstances can minimum wages increase without adverse effects on employment levels? In 31 Chinese provinces between 2004 and 2015, the employment effect of a minimum wage depended on the minimum wage level, foreign direct investment, per capita gross domestic product and labour productivity. A minimum wage increase reduced hiring as foreign direct investment inflow rose, regardless of the amount of investment. Any positive employment effect of a minimum wage increase was mitigated by per capita gross domestic product growth, except when per capita gross domestic product was above the average. Above-average labour productivity enhancement significantly mitigated the adverse employment effect of the minimum wage. Employers responded to a rising minimum wage by increasing hiring when the geometric growth rates of the minimum wage and foreign direct investment for a particular province within a period of time were above the overall average across provinces. However, they scrutinised both annual and overall economic growth within a time period when making hiring decisions in the face of minimum wage adjustments. An inverted U-shape relationship between minimum wages and employment suggest a maximum threshold value for the minimum wage. Thus, government policy measures should foster short-term and long-term economic growth, to facilitate employment creation when minimum wages increase. JEL Codes: J38, J21, F16, O40 © The Author(s) 2020.