Back Matter
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund
  • | 2 https://isni.org/isni/0000000404811396, International Monetary Fund

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Appendix

A Variable List

This list describes and explains all the main variables used in estimation.

  • County variable (from the ministry of labor)

    • –County is defined as the administrative division at the third level.

    • –MW: annual minimum wage. Annual minimum wages are average monthly minimum wages weighted by their durations within a year. Real effective minimum wages, used in the regression at the firm level, are denominated by the 4-digit industry product price index.

  • City variables (from the CNKI yearbook database)

    • –City is defined as the administrative division at the second level.

    • –city average wage: city wage per employee. Employees are those who work at the formal sector in the urban area of each city. City average wages are reported in the database. City total wages and a couple of sources for city total employees are used to replace missing values and outliers of city average wages.

    • —city GDPPC: city GDP per capita. GDP per capita are reported in the database. GDP and annual population are used to replace missing values and outliers of GDP per capita. Annual population is calculated as the simple average of city population at the beginning and the end of a year.

    • –growth rate of GDPPC: growth rate of city GDP per capita.

    • –fixed asset investment: the ratio of fixed asset investment to GDP. This variable is winsorized 1% at two sides with replacement.

    • –GDP share of 2nd industry: the ratio of output in the secondary industry to GDP.

    • –GDP share of 3rd industry: the ratio of output in the tertiary industry to GDP.

    • –growth rate of FDI: growth rate of foreign direct investment. FDI is reported in the database. FDI in the urban area is used to replace missing values and outliers of FDI.

    • –growth rate of labor: growth rate of urban and rural labor force. A couple of sources for labor force are reported in the database. The one with the fewest missing values and outliers is used and other sources provide supplementary information.

    • –unemployment rate: registered unemployment rate. The number of registered unemployed is reported in the database. It is further denominated by urban labor force, which is measured from a couple of sources reported in the database.

  • Province variables (from the CNKI yearbook database)

    • –Province is defined as the administrative division at the first level.

    • –CPI: consumer price index.

    • Pk: price index of fixed asset investment.

  • Industry variables (constructed from the annual survey of industrial firms or other sources)

    • –industry wage: real industry wage per employee. Industry is classified at the 2-digit level following the code of GB/T4754–2002. Real variables, same in the following, are denominated by the 4-digit industry product price index.

    • –industry output: real industry output per employee. Industry is classified at the 4-digit level following the code of GB/T4754–2002.

    • –HHI: Herfindahl index of firm sales in an industry. Industry is classified at the 4-digit level following the code of GB/T4754–2002.

    • –labor shareIND: industry labor income share. It is measured by the ratio of total wages to total gross output at the 4-digit industry level following the code of GB/T4754–2002.

    • –Py: price index of industry gross output.

    • Pm: price index of intermediate input. It is collected by BBZ (2011).

  • Firm variables (from the annual survey of industrial firms)

    • –L employees: annual firm employment. It is reported as the average of a firm’s end-of-month employees in a year.

    • –S: sales: annual sales revenue from main business.

    • –W: firm wage per employee. A firm’s wage is calculated as the sum of its wage bill, worker benefits, and unemployment insurance. It is common believed employers underreport actual earnings of employees in their income sheet and thus in the dataset. Since there is no evidence that underreporting varies systematically across industries, no adjustment is conducted in this paper. The average wage per employee is a firm’s wage denominated by its annual employment. This variable is winsorized 0.5% from the top and dropped if below one thousand Yuan a year.

    • –HMT: dummy variable of foreign firms controlled by citizens from Hong Kong, Macau, and Taiwan (cf. firms controlled by foreigners not including from HMT)

    • –SOE: dummy variable of state firms (cf. firms controlled by foreigners not including from HMT)

    • –PRV: dummy variable of domestic, private firms (cf. firms controlled by by foreigners not including from HMT)

    • –profit margin: the ratio of profit to sales. This variable is winsorized 0.5% at two sides with replacement.

    • –export/sales: the ratio of export to sales. This variable is winsorized 0.5% from the top.

1

The Graduate Institute, Geneva; Research Department, IMF and The Chinese University of Hong Kong. We thank: Olivier Blanchard, Harald Hau, Richard Portes, Raymond Torres, Tao Zhang, and Qiren Zhou for guidance; the Ministry of Human Resources and Social Security of China, Quheng Deng (CASS), Shi Li (Beijing Normal University and IZA), Chong Liu (Tsinghua), Ming Lu (Fudan), and Chunbin Xing (Beijing Normal University and IZA) for the data and helpful suggestions; numerous participants at seminars over the course of 2013–14 for comments; and Pengtu Ni, Dmitriy Skugarevskiy, and Hang Zhang for phenomenal research assistance.

1

For example, see an article “China pushes minimum wage rises” published in Financial Times, January 4,2012.

2

With the countywide data from the Urban Household Survey, Ge and Yang (2014) shows that the average real wage of the manufacturing sector is 2 percent below that of the whole sample in 2007.

3

They also find that if enforcement is costly and ex ante commitment is not feasible, for a government who is more concerned with efficiency than with distribution, optimal intensity of enforcement leads to the coexistence of non-compliance and a high minimum wage.

4

Our results provide evidence for the theoretical predictions of labor market models on competition, (dynamic) monopsony and efficiency wage, and labor market search with frictions: Manning (1995); Rebitzer and Taylor (1995); Bhaskar et al. (2002); Lang and Kahn (1998); Burdett and Mortensen (1998); Acemoglu (2001); Flinn (2006). Meer and West (2013) find that increases in the minimum wage reduce employment growth through effects on job creation.

5

As China’s leading institution that governs minimum wage regulations, the Ministry of Labor merged with the Ministry of Human Resources and was renamed the Ministry of Human Resources and Social Security in 2008.

6

Minimum wages are specified in the forms of monthly wages, part-time hourly wages, and full-time hourly wages. We choose to use monthly minimum wages in our estimation rather than the other two due to the relevance of monthly wages to the manufacturing sector. Hiring in the manufacturing sector usually involves relatively long and stable employment contracts compared with the service sector. The other reason is that most counties merely set full-time hourly minimum wages based on monthly minimum wages divided by a factor of around 175, presumably the typical number of working hours in a month for the manufacturing sector. The hourly minimum wage for full-time workers is thus practically the same measures as the monthly minimum wage.

7

They can be considered a better indicator for annual wage cost than end-of-year minimum wages. Otherwise, firm variables at the annual level may not be ideally matched with the duration of minimum wages. For example, an enactment of a new minimum wage in July should be discounted half for the first year. Since we have information on the date of adjustment, we have the advantage of being able to construct the annual minimum wage. The annual minimum wage is thus preferable to other measures.

8

As of 2007, there were 2,867 counties, 333 cities, and 31 provinces in mainland China. (See http://www.stats.gov.cn/tjsj/tjbz/xzqhdm/200802/t20080215_38311.html.) In China’s system, a prefectural city is not equivalent to a prefectural administrative division. With this name abuse in mind, we refer all China’s prefectural administrative divisions to prefectural cities. Furthermore, we refer them to cities if without confusion.

9

County area varies in China. For counties where more than a few manufacturing firms are located, a typical county has an area from 20 to 2000 square kilometers. For reference, the area of Hong Kong is 1,104 square kilometers. Therefore, adjacent counties are more ideal comparison groups than adjacent cities if we want to control for time-varying unobservables. The data shows that 22 percent cities have uniform levels of minimum wages for their counties and sub-districts, like Beijing, however, the other 78 percent cities have within-variation in minimum wages. Figure IV shows the spatial distribution of cities according to variations of their county minimum wages. Minimum wages are invariant within a city if the city’s minimum wages are same among its counties, and vice versa. We find that those cities with uniform minimum wages are concentrated in some provinces, especially two unpopulated western provinces, Tibet and Qianhai, and two northeastern provinces, Heilongjiang and Jilin.

10

In general, compared with the first economic census in 2004, the 2004 survey includes 20 percent of industrial firms, but covers 91 percent of China’s industrial output and 71 percent of China’s industrial employment. As reported by the 2004 economic census, the total employment of China’s manufacturing sector amounts to 93.4 million. The 2008 survey is not in our sample. For reference, compared with the second economic census in 2008, the 2008 survey includes 22 percent of industrial firms, but covers 88 percent of China’s industrial sales and 72 percent of industrial employment.

11

In this paper, firm ownership is categorized as state, collective, private, or foreign if it is explicitly defined in the dataset, otherwise it is attributed to the stockholder using the share of paid-in capital. We also follow the standard definition of a foreign firm in China which only requires more than 25 percent of stock shares to be controlled by foreigners. In principle, firms in the survey before 2007 should include all the firms in the sectors of mining, manufacturing, and utility, with annual sales more than five million Yuan. We refer to firms with annual sales above five million Yuan as “large firms”, and other firms as “small firms”. As a consequence, the sampling of the ASIF data is by design biased towards large firms. In regard to small firms, the reality is that the data still contains some small, non-state firms, and for small firms, the sampling bias is towards state firms. For more details, please see Appendix.

12

The rate of re-entry is calculated by the ratio of re-entrants to total entrants for every year.

13

For example, restaurants are chosen as the primary industry in main studies for western countries.

14

The wage rate of China’s manufacturing sector is calculated by the median of firm average wages over the county. City average wages are denoted by the median of city average wages over the county. The ratio between them was 65 percent in 2004 and remained stable over the period of 2001–2007. We can also examine the gap between them at the city level. In 2004, the wages of manufacturing firms were below city average wages in 96 percent of cities.

15

Other than minimum wages, we don’t have a complete panel data of economic variables at the county level. Some variables, such as consumer price index, can only be observed at the province level.

16

China National Knowledge Infrastructure, www.cnki.net

17

These 337 cities include four directly controlled municipalities by the central government as well as those 333 prefectural cities. Directly controlled municipalities are administered at the highest level, are are much larger in terms of their economic size, but their area size is similar to that of prefectural cities.

18

Occasionally cities and counties were divided up and/or combined into other regions. This division restructuring occurred more frequently in the 1990s and much less after 2003. We collect the corresponding information, and adjust the city and county code for all the affected firms. Because adjustments to minimum wages should take into account all the regional conditions, no county should have experienced a hike in minimum wages due to the change of its administrative division. This fact is confirmed in the data.

19

Previous studies on regional employment typically interpret the employment equation as demand equations, although many include as explanatory variables supply-side variables because regional employment is determined by the interaction of demand-side factors and supply-side factors (Card and Krueger, 1995, 185).

20

The importance to control for variables measuring output prices and the cost of capital is stressed in Card and Krueger (1995, 184).

21

Intuitively, the first term “1” in the sum indicates the structure of constant cost share of labor. The second term β(σ−1) shows that the effect of wage on a firm’s average cost depends on labor share β and price elasticity σ. Finally, the part of β(σσ1)σ in the employment equation implies that firm employment is correlated positively with firm labor share and price elasticity.

22

We use urban consumer price index to account for concerns of government officials. Furthermore, a majority of manufacturing firms are located in the urban area. CPI measures relative changes in living cost over time. Since only relative variations matter, CPI is suffice to be used.

23

The minimum wage in the following refers to the annual minimum wage we defined in the above.

24

The law was enacted in 1994, but because some cities started to report minimum wages several years later, the city sample is unbalanced.

25

For reference, the area of Hong Kong is 1,104 square kilometers.

26

Logarithms of most of the explanatory variables, if they are not ratios, for instance, are also used, so their coefficients should be interpreted as elasticities.

27

We dropped firms that changed locations over the sample period.

28

For detailed discussion that the minimum wage in the US arguably is a more appropriate variable than is the Kaitz index, see Card and Krueger (1995, 215). One particular reason is that the minimum wage and the average wage are not independent sources of variation.

29

Under-reporting of labor share in the ASIF data has been well documented. For example, see Hsieh and Klenow (2009)

30

For example, if 3 percent of firms have average wages lower than the minimum wage, there are very likely to be a considerable amount, say more than 10 percent, of firms who pay some employees at a rate below the minimum wage. This is not supported by current evidence.

31

0.103×0.08=0.008

Minimum Wages and Firm Employment: Evidence from China
Author: Yi Huang, Mr. Prakash Loungani, and Gewei Wang