Hostname: page-component-7d8f8d645b-clzrd Total loading time: 0 Render date: 2023-05-29T05:01:43.580Z Has data issue: false Feature Flags: { "useRatesEcommerce": true } hasContentIssue false

Minimum Wage and Corporate Investment: Evidence from Manufacturing Firms in China

Published online by Cambridge University Press:  18 January 2021

Heng (Griffin) Geng
Victoria University of
Yi Huang
Graduate Institute of
Chen Lin*
University of Hong Kong
Sibo Liu
Hong Kong Baptist
* (corresponding author)


This article studies how minimum-wage policies affect capital investment using the industrial census of manufacturing firms in China, where minimum-wage policies vary across counties. Exploiting discontinuities in minimum-wage policy at county borders, we find that minimum wages increase capital investment. The investment response to minimum wages is stronger for firms that are labor intensive, that have more room for technological improvement, and that cannot sufficiently pass on labor costs to consumers. A natural experiment based on county jurisdictional changes further assures the causal relationship.

Research Article
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)


We thank Renee Adams, Chun Chang, Luke Chu, Jennifer Conrad (the editor), Jan Feld, Richard Freeman, Eric French, Matthew Gustafson (the referee), Wei Huang, Oğuzhan Karakaş, Bibo Liu, Yao Lu, Claudio Michelacci, Marco Pagano, Vincenzo Quadrini, Hélène Rey, Rui Shen, Tao Shen, Qi Sun, Paolo Volpin, Michael Weber, Wei Xiong, Haichun Ye, and the conference and seminar participants at Auckland University of Technology, the Chinese University of Hong Kong (Shenzhen), the Graduate Institute of Geneva, Harvard University, the Labor and Finance Working Group, the 2017 Society for Financial Studies (SFS) Cavalcade Asia-Pacific, Shanghai University of Finance and Economics, the Swiss Finance Institute, and Tsinghua University for their helpful comments. The work described in this article was partially supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region, China (Project No. T35/710/20R)


Aaronson, D.Price Pass-Through and the Minimum Wage.” Review of Economics and Statistics, 83 (2001), 158169.CrossRefGoogle Scholar
Aaronson, D.; Agarwal, S.; and French, E.. “The Spending and Debt Response to Minimum Wage Hikes.” American Economic Review, 102 (2012), 31113139.CrossRefGoogle Scholar
Acemoglu, D., and Finkelstein, A.. “Input and Technology Choices in Regulated Industries: Evidence from the Health Care Sector.” Journal of Political Economy, 116 (2008), 837880.CrossRefGoogle Scholar
Acemoglu, D., and Restrepo, P.. “Robots and Jobs: Evidence from US Labor Markets.” Journal of Political Economy, 128 (2020), 21882244.CrossRefGoogle Scholar
Agarwal, S.; Ambrose, B.; and Diop, M.. “Do Minimum Wage Increases Benefit Intended Households? Evidence from the Performance of Residential Leases.” Working Paper, Federal Reserve Bank of Philadelphia (2019).CrossRefGoogle Scholar
Agarwal, S., and Qian, W.. “Consumption and Debt Response to Unanticipated Income Shocks: Evidence from a Natural Experiment in Singapore.” American Economic Review, 104 (2014), 42054230.CrossRefGoogle Scholar
Aghion, P.; Bloom, N.; Blundell, R.; Griffith, R.; and Howitt, P.. “Competition and Innovation: An Inverted-U Relationship.” Quarterly Journal of Economics, 120 (2005), 701728.Google Scholar
Aldatmaz, S.; Ouimet, P.; and Wesep, E. D. Van. “The Option to Quit: The Effect of Employee Stock Options on Turnover.” Journal of Financial Economics, 127 (2018), 136151.CrossRefGoogle Scholar
Autor, D. H.; Levy, F.; and Murnane, R. J.. “The Skill Content of Recent Technological Change: An Empirical Exploration.” Quarterly Journal of Economics, 118 (2003), 12791333.CrossRefGoogle Scholar
Besley, T., and Burgess, R.. “Can Labor Regulation Hinder Economic Performance? Evidence from India.” Quarterly Journal of Economics, 119 (2004), 91134.CrossRefGoogle Scholar
Bova, F., and Yang, L.. “Employee Bargaining Power, Inter-Firm Competition, and Equity-Based Compensation.” Journal of Financial Economics, 126 (2017), 342363.CrossRefGoogle Scholar
Bradley, D.; Kim, I.; and Tian, X.. “Do Unions Affect Innovation?Management Science, 63 (2017), 22512271.CrossRefGoogle Scholar
Brandt, L.; Biesebroeck, J. Van; and Zhang, Y.. “Creative Accounting or Creative Destruction? Firm-Level Productivity Growth in Chinese Manufacturing.” Journal of Development Economics, 97 (2012), 339351.CrossRefGoogle Scholar
Burkhauser, R.; Couch, K.; and Wittenburg, D.. “A Reassessment of the New Economics of the Minimum Wage Literature with Monthly Data from the Current Population Survey.” Journal of Labor Economics, 18 (2000), 653680.CrossRefGoogle Scholar
Card, D., and Krueger, A. B.. “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania.” American Economic Review, 84 (1994), 772793.Google Scholar
Card, D., and Krueger, A. B.. Myth and Measurement: The New Economics of the Minimum Wage, 20th-anniversary ed. Princeton, NJ: Princeton University Press (2015).CrossRefGoogle Scholar
Casale, G., and Zhu, C.. Labour Administration Reforms in China. Geneva, Switzerland: International Labour Office (2013).Google Scholar
Caselli, F., and Wilson, D. J.. “Importing Technology.” Journal of Monetary Economics, 51 (2004), 132.CrossRefGoogle Scholar
Chang, X.; Fu, K.; Low, A.; and Zhang, W.. “Non-Executive Employee Stock Options and Corporate Innovation.” Journal of Financial Economics, 115 (2015), 168188.CrossRefGoogle Scholar
Cho, D. “Downward Wage Rigidity, Corporate Investment, and Firm Value.” Working Paper, Peking University (2018).CrossRefGoogle Scholar
Cleary, S.The Relationship between Firm Investment and Financial Status.” Journal of Finance, 54 (1999), 673692.CrossRefGoogle Scholar
Clemens, J.Making Sense of the Minimum Wage: A Roadmap for Navigating Recent Research.” Working Paper, University of California San Diego (2019).Google Scholar
Cull, R.; Li, W.; Sun, B.; and Xu, L. C.. “Government Connections and Financial Constraints: Evidence from a Large Representative Sample of Chinese Firms.” Journal of Corporate Finance, 32 (2015), 271294.CrossRefGoogle Scholar
Cull, R., and Xu, L. C.. “Who Gets Credit? The Behavior of Bureaucrats and State Banks in Allocating Credit to Chinese State-Owned Enterprises.” Journal of Development Economics, 71 (2003), 533559.CrossRefGoogle Scholar
Dube, A.; Lester, T. W.; and Reich, M.. “Minimum Wage Effects Across State Borders: Estimating Using Contiguous Counties.” Review of Economics and Statistics, 92 (2010), 945964.CrossRefGoogle Scholar
Eaton, J., and Kortum, S.. “Trade in Capital Goods.” European Economic Review, 45 (2001), 11951235.CrossRefGoogle Scholar
Ellul, A., and Pagano, M.. “Corporate Leverage and Employees’ Rights in Bankruptcy.” Journal of Financial Economics, 133 (2019), 685707.CrossRefGoogle Scholar
Ellul, A.; Pagano, M.; and Schivardi, F.. “Employment and Wage Insurance Within Firms: Worldwide Evidence.” Review of Financial Studies, 31 (2018), 12981340.CrossRefGoogle Scholar
Fama, E., and French, K.. “Size and Book-to-Market Factors in Earnings and Returns.” Journal of Finance, 50 (1995), 131155.CrossRefGoogle Scholar
Favilukis, J. Y.; Lin, X.; and Zhao, X.. “The Elephant in the Room: The Impact of Labor Obligations on Credit Markets.” American Economic Review, 110 (2019), 16731712.CrossRefGoogle Scholar
Fazzari, S. M.; Hubbard, R. G.; Petersen, B. C.; Blinder, A. S.; and Poterba, J. M.. “Financing Constraints and Corporate Investment.” Brookings Papers on Economic Activity, 19 (1988), 141206.CrossRefGoogle Scholar
Gan, L.; Hernandez, M.; and Ma, S.. “The Higher Costs of Doing Business in China: Minimum Wages and Firms’ Export Behavior.” Journal of International Economics, 100 (2016), 8194.CrossRefGoogle Scholar
Gustafson, M., and Kotter, J.. “Minimum Wage and Corporate Policy.” Working Paper, Center on Budget and Policy Priorities (2018).Google Scholar
Hau, H.; Huang, Y.; and Wang, G.. “Firm Response to Competitive Shocks: Evidence from China’s Minimum Wage Policy.” Review of Economic Studies, 87 (2020), 26392671.CrossRefGoogle Scholar
Hornbeck, R., and Naidu, S.. “When the Levee Breaks: Black Migration and Economic Development in the American South.” American Economic Review, 104 (2014), 963990.CrossRefGoogle Scholar
Huang, Z.; Li, L.; Ma, G.; and Xu, L. C.. “Hayek, Local Information, and Commanding Heights: Decentralizing State-Owned Enterprises in China.” American Economic Review, 107 (2017), 24552478.CrossRefGoogle Scholar
Johnson, S.; McMillan, J.; and Woodruff, C.. “Property Rights and Finance.” American Economic Review, 92 (2002), 13351356.CrossRefGoogle Scholar
Lewis, E.Immigration, Skill Mix, and Capital Skill Complementarity.” Quarterly Journal of Economics, 126 (2011), 10291069.CrossRefGoogle Scholar
Li, H.; Li, L.; Wu, B.; and Xiong, Y.. “The End of Cheap Chinese Labor.” Journal of Economic Perspectives, 26 (2012), 5774.CrossRefGoogle Scholar
Lin, C.; Schmid, T.; and Xuan, Y.. “Employee Representation and Financial Leverage.” Journal of Financial Economics, 127 (2018), 303324.CrossRefGoogle Scholar
Liu, T.; Mao, Y.; and Tian, X.. “The Role of Human Capital: Evidence from Patent Generation.” Working Paper, Cornell University (2017).Google Scholar
Long, C., and Zhang, X.. “Cluster-Based Industrialization in China: Financing and Performance.” Journal of International Economics, 84 (2011), 112123.CrossRefGoogle Scholar
Ma, W.; Ouimet, P.; and Simintzi, E.. “Mergers and Acquisitions, Technological Change and Inequality.” Working Paper, European Corporate Governance Institute (2018).Google Scholar
Ma, Y.; Tang, H.; and Zhang, Y.. “Factor Intensity, Product Switching, and Productivity: Evidence from Chinese Exporters.” Journal of International Economics, 92 (2014), 349362.CrossRefGoogle Scholar
Michelacci, C., and Quadrini, V.. “Financial Markets and Wages.” Review of Economic Studies, 76 (2009), 795827.CrossRefGoogle Scholar
Mueller, H. M.; Ouimet, P. P.; and Simintzi, E.. “Within-Firm Pay Inequality.” Review of Financial Studies, 30 (2017), 36053635.CrossRefGoogle Scholar
Neumark, D., and Wascher, W. L.. Minimum Wages. Cambridge, MA: MIT Press (2008).CrossRefGoogle Scholar
Penman, S.The Articulation of Price-Earnings Ratios and Market-to-Book Ratios and the Evaluation of Growth.” Journal of Accounting Research, 34 (1996), 235259.CrossRefGoogle Scholar
Ru, H.Government Credit, a Double-Edged Sword: Evidence from the China Development Bank.” Journal of Finance, 73 (2018), 275316.CrossRefGoogle Scholar
Shleifer, A., and Vishny, R. W.. The Grabbing Hand: Government Pathologies and Their Cures. Cambridge: Harvard University Press (2002).Google Scholar
Simintzi, E.; Vig, V.; and Volpin, P.. “Labor Protection and Leverage.” Review of Financial Studies, 28 (2015), 561591.CrossRefGoogle Scholar
Sonobe, T., and Otsuka, K.. Cluster-Based Industrial Development: An East Asian Model. New York: Palgrave Macmillan (2006).CrossRefGoogle Scholar
Stigler, G. J.The Economics of Minimum Wage Legislation.” American Economic Review, 36 (1946), 358365.Google Scholar
Ye, L.; Gindling, T. H.; and Li, S.. “Compliance with Legal Minimum Wages and Overtime Pay Regulations in China .” IZA Journal of Labor & Development, 4 (2015), 1650.CrossRefGoogle Scholar