The impact of minimum wage on China - based on the perspective of labor employment
1. Introduction
1.1 Background
Minimum wage policies have remained a matter of discussion and or debate regard of the fact that the polices have been more of implementation in the developing world. China is the largest developing country in the world and the second largest economy in the world, so it is a good reason to evaluate the impact of the minimum wage system on employment in the labor market. Taking China as a case study, this paper studies the relationship between the change or introduction of the minimum wage policy and the development of the labor market due to the rapid economic expansion and structural changes since the implementation of the Provisions on Minimum Wages in December 2003. China's economic landscape is characterized by considerable regional disparities and a diverse industrial structure, typically divided into three main economic regions: this has created the developed eastern region, the transitioning central region, and the developing western region. Each area has different economy, and its performance can also differ which may lead to different reactions to policies concerning the minimum wage. Of course, China's major industry sectors: Manufacturing, Services, and Agriculture could be impacted in different ways due to fluctuations in the labor regulation.
The transitional change of China Labor Market: From 2000 to 2022, two distinct labor shortage phenomena are revealed in China. These events giving rise to events reflecting an increasing concern over the wage rates rather than its absence in terms of availability of workforce for employment underlined the need for a deeper understanding of the minimum wage policies and its impact on the employment scenario in a growing economy.
1.2 Significance
Hence, this study owns the most value to the existing literature on minimum wage effects by offering an extensive evaluation of China's minimum wages on employment across regions and industries. Our research distinguishes itself in several key aspects: First, we go beyond the national-level effects and explore regional differences in the impacts of minimum wage, as well as differences arising from a distinction based on major industrial sectors in China. Therefore, this approach captures the nature of the minimum wage policies that the large, economically diverse country such as Russia needs for informed policymaking in nations that have very significant regional variations.
Secondly, we use the Consumer Price Index (CPI) in the model due to the impact of inflation on the percentage link between the minimum wage policies and employment results. It also offers an extension to the analysis of various economic forces at work that has often been missing in most of the prior literature. Thirdly, since the minimum wage policies have been implemented around the world in different periods starting from year 2000 up to 2022 it can capture the short-run effects and the ability of labor markets to adapt in the long-run.
The applied methodology involves a fixed-effects panel data approach; the analysis uses extensive data from reputable databases. The implications of the findings for future research and policy entail that while minimum wage is effective in improving the welfare of the working poor, this is not an automatic process and calls for a more nuanced approach in minimum wage regulation in China and possibly other emerging economies. This research seeks to fill this gap, and thus may be relevant for designing better and more complex labor market policies for developing countries that struggle with labor rights and development.
1.3 Structure of the dissertation
Section 2: Literature Review
This section focuses on the empirical evidence on the impact of minimum wages on labor employment,
Section 3: Research content and method：
Section 4: Current situation of China's minimum wage system
This part studies the current situation of the minimum wage and its impact on the individual level through the visual data method, which is mainly composed of four parts: Analysis of Minimum wage from 2000 to 2024, Minimum wage standard and average wage of employees, Minimum wage standard and per capita consumption level of urban residents, Analysis of Minimum Wage and GDP per capita in China, Minimum wage and minimum living standards for urban residents
Section 5: Data and Analysis
This part studies the relationship between the minimum wage and labor employment through various data methods, including econometric models that study the relationship between the minimum wage and labor employment in three aspects: national, regional and industrial. For example, descriptive line statistical analysis, correlation analysis, economic model selection, regression analysis.
Section 6: Conclusion
2. Literature review
2.1 Relevant literature on minimum wages
The effect of minimum wages on employment rates has been controversial in the literature. The papers published by scholars in this field have come to different conclusions and sometimes even contradictory findings (Neumark & Wascher, 2004). Prior to 1990, Brown et al. (1982), who observed an inverse relationship between minimum wages and employment. David Neumark and William Wascher conclude from a national analysis that "a 10 percent increase in the minimum wage leads to a 1 to 2 percent decline in teen employment and a 1.5 to 2 percent decline in young adult employment," The minimum wage also has a negative impact on the employment of teenagers and young people (Neumark & Wascher, 1992). In the early 1990s, however, a series of studies by David Card, Alan Krueger, and Lawrence Katz revived the dissenting opinion on the employment effects of minimum wages. Card, Krueger, and Katz revisited Neumark and Wascher's 1992 study and, after changing the methodology, came up with a result consistent with theirs (from the Texas and New Jersey study) that there was no negative effect on employment (Card et al.1994). For the relevant literature since the 1980s, Neumark and Wastcher (2006) concluded that about 85% of the empirical conclusions also support minimum labor, the conclusion that capital increase reduces employment. Belman and Wolfson conducted a 2014 analysis of 74 minimum wage studies published after 2000 and found that the results of these studies varied widely in terms of significance and magnitude. Manning (2021) acknowledges the existence of an inconsistent relationship between wages and employment and argues that labor economists should focus on identifying the level at which minimum wages have a negative effect on employment.
The debate about the effect of minimum wages on employment persists in China and other countries. Chinese scholars believe that the minimum wage system will have an impact on employment, making workers at the bottom of the employment unable to find jobs (Zhang Wuchang, 2002). Wuyou (2014) found that Shanghai was the economic and financial center of China, but with the development of economy, the income of urban and rural residents was also increasing. In this regard, Quanheng and Liling (2011) showed from an empirical perspective that the increase in the minimum wage standard did not narrow the income gap. Although raising the minimum wage standard can ease labor relations in a certain sense, a blindly increasing minimum wage standard will have a negative impact on the employment of workers. (Wuyou, 2014)
2.2 Labor market related literature
Scholars have paid selective attention to the impact of the minimum wage on employment in China's labor market, mainly focusing on the minimum wage on the final state of employment in the labor market, but on the level of labor demand and supply
2.3Regional approaches to the minimum wage and employment
Card (1992) used regional differences in employment and wages to study how the federal minimum wage increases in 1990 affected the employment of teenagers. This study, along with several others conducted in the early 1990s, laid the foundation for modern minimum wage analysis (Neumark & Wascher, 1992; Katz and Krueger, 1992; Williams,1993). Recent contributions to this literature have continued to expand the scope of research in the 1990s. A 2019 U.S. county-level analysis of the agriculture industry looked at long-run elasticities and found evidence that "a 10% increase in the minimum wage is associated with a 4% decline in total agricultural employment 10-20 years later." (Kandilov& Kandilov, 2020).
2.4Gaps in the Literature
Despite this extensive body of research, significant gaps remain in our understanding of minimum wage effects, particularly in the context of large, diverse economies like China:
(1)Regional Heterogeneity: Still, most of the work is devoted to identifying the national-level impacts or influence, or the focus is only on some places while ignoring the fact that the effects may differ for different regions of this country.
(2) Sectoral Differences: The research, therefore, fails to consider how the impacts of minimum wage could be mixed with the different industrial sectors.
(3) Long-term Dynamics: Most available research gives cross-sectional visions alone while excluding changes that do occur after sometime within the labor market adaptations.
(4) Inflation Considerations: The issue of inflation concerning minimum wages is rather often nudged aside, leading to the distortion of results.
The given analysis does not answer these questions sufficiently; thus, our study aims to fill these gaps by performing an extensive empirical investigation of the impact of minimum wage on China from 2004-2022. We include the heterogeneity usually left out in other research by looking at the three regions, Eastern, Central, and Western, and the three large industrial categories: manufacturing, services, and agriculture. Including CPI data to consider the inflationary effect gives the real picture of real wages. In addition, our long-term horizon allows us to consider both short-term effects and changes after the occurrence of events. It provides a new perspective on the impact of minimum wages on the existing literature. It has important implications for policymakers in China and other countries in the developmental phase. Our study provides a scientific basis for more suitable and efficient minimum wage regulation based on analyzing the relationship between minimum wages, regional income differences, and sectoral and inflation behavior.
3.Research content and method
3.1Research content
This paper takes the impact of the minimum wage on labor employment as the main research objective and studies. It discusses the impact of the minimum wage on China's labor employment through empirical analysis.
(1) By collecting and analyzing the minimum wage data of 31 provinces, autonomous regions, and municipalities directly under the central government, this paper studies China's minimum wage situation.
(2) By analyzing the impact of the minimum wage system on labor employment, enterprise costs, economic development, and industrial restructuring.
(3) The econometric model was developed using aggregated panel data of minimum wage, employment volume, and GDP collected from workers aged 16-64 in 30 regions of China from 2000 to 2022. The panel data is then used for regression analysis and to investigate the impacts of the minimum wage on labor employment in three dimensions, namely, from the national, regional, and industrial perspectives.
3.2Research method
This study will adopt the following three analytical methods and use the following data and tools for research:
(1) Data analysis: by collecting China's minimum wage data, this paper investigates the establishment of the two minimum wage standards by calculating and analyzing the minimum wage standard data and comparing the minimum wage standard with the monthly average wage of workers, per capita consumption expenditure, real GDP, real minimum wage standard and minimum living security standard.
(2) Empirical research and analysis: Using panel data and the Hausman test, we use the fixed effect model for regression analysis to examine the overall impact of the minimum wage standard on China's labor employment and the impact of different regions and industries on labor employment from the empirical level.
3.3 Key Considerations in Minimum Wage Setting
The main issue characteristic of China's decentralized minimum wage setting is analysis based on the econometric approach. Factors influencing it include average wages in the local governments, living costs, and existing general economic conditions. This poses endogeneity problems in most econometric exercises whereby employment levels, which are most often specified as dependent variables, determine minimum wage, which is an independent variable in most cases. The link between general wage levels and a minimum wage increase also goes hand in hand with making the analysis more difficult.
3.4 Adjustment Mechanism
Since China's minimum wage has been adjusted biennially and there are conditions for more frequent adjustments, there are multiple rich time-series and panel data to analyze. However, we have time-varying treatment coefficients that need to be addressed when using this specification. Preemptive action by employers and employees in reaction to changes they anticipate contributes to another degree of confusion on the effects of policies. Some establishments may alter employment strategies with wages' anticipation in policy changes, which may complicate the cues on policy shifts. Researchers use employee turnover rates and labor hours as measures of employment changes.
3.5 Procedures and Processes
Minimum wage policies are subjected to several implementation stages that affect econometric analysis. Government research tends to lag between decisions – economic changes, and policy responses. The outcomes of other public hearings that include various players in policy making may result in policy endogeneity since policy makers may be influenced by some groups depending on current or anticipated economic situations. While unambiguous policy regime shifts known in advance help identify the effects of changes 'before and after,' there is always the risk that the announcement of such changes affects the behavior. of economic agents, which creates challenges when identifying impacts.
These particularities of China's minimum wage policy entail strings of relations relevant to research that learners must apprehend. The existence of such issues may not be explained well by conventional econometric techniques; hence, there is a need to use better methods. One can overcome the issue of endogeneity and reverse causality by using such techniques as instrumental variables, regression discontinuity, or synthetic control. Exploiting geographical differences in timing and magnitude of minimum wages may increase – through difference- -difference estimations to provide cleaner identification of policy impacts from other factors.
In conclusion, it is noted that although China's minimum wage policy supports a flexible regionally differentiated approach, it poses significant methodological problems to economic investigators. It is essential to understand the intricacies to ensure proper study frameworks are established, proper analysis methods are chosen, and results are interpreted appropriately in China's multifaceted and dynamic economy.
4.Current situation of China's minimum wage system
4.1 Minimum wage changes from 2000 to 2022
Figure 1 Changes in the average minimum wage in China from 2000 to 2024
Source: Compiled from data in tables 1 and 2.
As seen in Figure 1, from 2000 to 2024, the minimum wage has shown a continuous growth trend. The increase in minimum wage rates is particularly significant between 2004 and 2015. the minimum average salary was about 250 yuan in 2000, rose significantly to about 600 yuan in 2004, a large increase, continued to increase to about 1200 yuan in 2010, increased further to about 1600 yuan in 2015, reached about 1900 yuan in 2020, and is projected to reach approximately 2100 yuan.
Figure 2 Changes in the standard deviation of the average minimum wage in China from 2000 to 2024
Data source: obtained from data collated from Table 1 and Table 2
The graph from Figure 2 demonstrates the changes in the standard deviation of the minimum wage standard of each province and city in China between 2000 and 2024. The standard deviation reflects the degree of dispersion of the minimum wage standard in each province and city, and the larger the standard deviation, the greater the difference of the minimum wage standard in each region.
From 2000 to 2024, the standard deviation of the minimum wage standard shows an overall upward trend. Especially after 2010, the standard deviation fluctuates more significantly, reflecting the increase in the differences in minimum wage standards across regions. From 2000 to 2010, the standard deviation gradually increased from 60 to around 100, indicating that the differences in minimum wage standards across regions began to appear, but the increase was relatively slow; from 2011 to 2012, the standard deviation increased significantly, jumping from around 100 to around 150, reflecting that the differences in minimum wage standards across regions increased during this period and that the standard deviation of minimum wage standards across regions increased from around 100 to around 150. reflecting the increase in the difference in the adjustment rate of minimum wage standards across regions during this period; from 2013 to 2020, the standard deviation fluctuates between 150 and 200, during which the difference in minimum wage standards across regions continues to widen; and from 2021 to 2024, it is expected that the standard deviation will be around 200, reflecting the fact that the difference in minimum wage standards across regions will still remain at a relatively high level in the future.