Employment and Working Hour Effects of Minimum Wage Increase: Evidence from China

• DOI: http://doi.org/10.1111/j.1749-124X.2014.12062.x
• Author: Peng Jia
• Date: 01 March 2014
• Published date: 01 March 2014

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China & World Economy / 61–80, Vol. 22, No. 1, 2014

©2014 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Employment and Working Hour Effects of Minimum

Wage Increase: Evidence from China

Peng Jia*

Abstract

Using a difference-in-differences model, the present paper provides empirical evidence of

minimum wage effects on employment and working hours in China. The results show that

male employment is not affected by a minimum wage increase, although men’s working

hours do increase. In contrast, female employment is more likely to be negatively affected by

a minimum wage increase, while their working hours remain unchanged. This may lead to

women being in a more disadvantaged position in the workforce, and adopting a monthly

minimum wage may induce firms to extend men’s working hours. Therefore, to better

protect disadvantaged workers, we suggest that minimum wage regulation should focus on

the target group of less-educated women, and that a unified minimum hourly wage needs to

be set for both full-time and part-time workers. Meanwhile, the importance of human capital

accumulation should be addressed in alleviating the negative effects of minimum wage

increases.

Key words: difference-in-differences model, employment, minimum wage, working hours

JEL codes: J22, J31, J38

I. Introduction

Minimum wage regulation is widely-used in labor markets around the world to ensure basic

living standards are met by workers. However, there is still no consensus on the effects of

establishing a minimum wage. Since China issued its first minimum wage regulation in 1993,

both the coverage and the absolute level of minimum wage have increased. However, there

is still not enough evidence on how minimum wage increases affect disadvantaged workers;

*Peng Jia, Postdoctoral Researcher, Institute of Population and Labor Economics, Chinese Academy of Social

Sciences, Beijing, China. Email: jiapeng@jiapeng.org. The author is grateful for financial support from the National

Social Science Foundation of China (Grant No. 13CYJ017), the China Postdoctoral Science Foundation (Grant

No. 2012M520506) and the Ministry of Education of China (Grant No. 12JJD790042).

62 Peng Jia / 61–80, Vol. 22, No. 1, 2014

©2014 Institute of World Economics and Politics, Chinese Academy of Social Sciences

these workers should be granted more attention and protected through minimum wage policy.

The possible effects of a minimum wage have long been discussed in the field of labor

economics. Among these effects, the employment effect has been the main concern, and it is

also considered to be the basis for analyzing other minimum wage effects (e.g. spillover

effects). According to labor economics theory (Brown, 1999), the minimum wage has a negative

impact on employment in a competitive labor market. However, this notion has long been

challenged, both theoretically and empirically. Theoretically, if firms have monopsony power

and the initial minimum wage is low, a minimum wage increase will actually enhance employment

(Cahuc and Zylberberg, 2004). Empirically, as pointed out by Neumark and Wascher (2007),

there is still no overall consensus on the employment effect. Some find that the minimum

wage has no negative impact on employment (Card and Krueger, 1994; Dickens et al., 1999;

Machin et al., 2003), while others find a negative impact (Neumark and Wascher, 1992;

Burkhauser et al., 2000).1 Neumark and Wascher (2008) summarize earlier empirical studies on

the employment effect and find that differences in empirical results originate from the different

methods and data sources that are applied.

In reaction to a minimum wage increase, the labor market can adjust at both the

extensive margin and the intensive margin, which means both employment and working

hours may be changed in response to a minimum wage increase. In the long run, firms in

pursuit of profit maximization will choose an optimized combination of employment and

working hours according to the fixed cost of employment, production technology and

labor supply (Stewart and Swaffield, 2008). However, in the short run, adjustment of

working hours is easier than adjustment of employment (Hamermesh, 1993). Hence,

minimum wage effects may be underestimated if the working hour effect is ignored (Couch

and Wittenburg, 2001). Linneman (1982) and Neumark et al. (2004) both suggest that it is

crucial to study the working hour effect if we want to evaluate the full impact of a

minimum wage on low-wage workers.

Since 2010, many provinces in China have raised the minimum wage on a regular basis.

On average, provinces increase the minimum wage every 1.2 years.2 However, there are few

serious evaluations of how this regular increase in the minimum wage has affected labor

market outcomes, especially the living standards of disadvantaged workers. Moreover,

among the few minimum wage studies on China, most focus only on the employment effect

(Luo, 2007; Zhang et al., 2009; Ding, 2010; Ma et al., 2012), and there is still no research on

the working hour effect.

1As there are already many reviews of the minimum wage literature, the author will not include a detailed

discussion of this topic. Please refer to Neumark and Wascher (2008) for a review.

2 This value is calculated by the author based on the China Minimum Wage Database.