1.1 Introduction
Since China began its reform and opening-up policies in 1978, the country has been in the midst of a transition from a planned economy to a market economy. As a result, the country faces economic and social problems that have become impediments to its long-term sustainable development. Moreover, social instability resulting from widening income inequality, corruption, and social exclusion has become a major concern for the Chinese government. To respond to these challenges, both the central and local governments are placing a new emphasis on inclusive growth by introducing a number of new policies and regulations. In particular, in recent years, the government has actively intervened in the labor market, including increasing job training opportunities for unskilled workers and migrant workers, more strictly implementing new labor contracts, ensuring job stability, and expanding the coverage of social insurance programs.
Raising the minimum wage was one of the Chinese governmentâs most important labor market interventions. Since implementing the âMinimum Wage Regulationsâ in 2004, the nominal minimum wage has increased significantly, averaging growth of 11% per year nationally. The process is largely driven by political competition between local governments at the city and provincial levels in response to the central governmentâs appeal to raise the wage share of national income, as outlined in the 12th Five-Year Plan.1 The plan specifies that the mean minimum-to-average wage ratio should reach 0.4 by 2015. As of 2009, the ratio was 0.29.2
Because the Chinese political system is highly centralized and hierarchical, the determination of the minimum wage in China can be quite different from that of developed and other developing countries. Local governments are eager to win support from the central government in the form of infrastructure development, fiscal transfers, bank loans, and land use. In particular, the promotions of local officials at the provincial and city levels are determined by the central government.3 Raising the minimum wage signals their determination to address issues such as income inequality that could otherwise threaten political stability.
In past decades, local governments kept minimum wages low because they worried that high wages would cause jobs to shift to districts with cheaper labor costs, exacerbating already high levels of unemployment. Once Chinaâs labor market began to boom, concerns over unemployment diminished, and local governments began substantially and consistently raising wages. Local governments calculated that if any disemployment effect occurred from wage increases, migrant workers would be the ones to lose their jobs. As migrant workers are not eligible for unemployment benefits, any increase in migrant worker unemployment would not drive up fiscal spending. Given this dynamic, the most significant wage hikes have been enacted by local governments in coastal cities, which host the most migrant workers.
Since then, the minimum wage policy has been regarded as the solution by the Chinese government and is extremely welcome among the public, not only to protect workers with a wage floor but also to increase the income of the poor and reduce inequality.4 Nevertheless, very limited empirical research has studied the consequences of the minimum wage policy in China. This book seeks to answer the following questions:
- 1.What are the wage and employment effects of Chinaâs minimum wage?
- 2.What are the procedures for minimum wage setting at the city and provincial levels in China, and is there a ârace to the topâ in minimum wage standards among local governments?
- 3.What are the impacts of minimum wages on wage distribution, the gender wage gap, and income inequality?
- 4.What are the impacts of minimum wages on migrant workers in China?
- 5.Do minimum wages affect Chinese firmsâ investment in human and fixed capital and profits?
To better understand the important role that the minimum wage policy has played in the Chinese government, we briefly introduce its history and legislative background in the next section.
1.2 A Brief History of Minimum Wage Legislation in China
Prior to 1994, China had no minimum wage law, and the country merely acknowledged the 1928 âMinimum Wage Treatyâ of the International Labour Organization (ILO) in 1984. In 1993, China issued the first national minimum wage regulations. In July of 1994, these regulations were written into Chinaâs new labor law.
The 1994 legislation required that all employers pay employees wages that were not lower than the local minimum wage. Furthermore, all provincial, autonomous region, and municipal governments were required to set the minimum wage according to six principles: the minimum living expenses of workers, the average number of dependents workers support, local average wages, the level of labor productivity, the level of local employment, and the level of economic development. These conditions provided considerable flexibility for provinces in setting minimum wages, with the economic development principle giving them the flexibility to limit the minimum wage to attract foreign investment (Frost 2004; Wang and Gunderson 2011). High minimum wages would mean higher operational costs, which could reduce Chinaâs attractiveness in the eyes of foreign investors in Chinese businesses.
In the early 2000s, sluggish growth in minimum wages and growing concerns for uninsured workers led the government to introduce new minimum wage regulations. The new law, announced in January 2004, extended coverage to employees in state-owned and private enterprises, self-employed businesses, and private nonenterprise (nonprofit) units.5 In particular, the new law established two types of minimum wages: a monthly minimum wage applied to full-time workers and an hourly minimum wage applied to part-time employees.
Moreover, the minimum wage standards are set and adjusted jointly by the local government, trade union, and enterprise confederation of each province. The draft is then submitted to the Ministry of Labor and Social Security for review, and the ministry asks for opinions from the All-China Federation of Trade Unions (ACFTU) and the China Enterprise Confederation. The ACFTU, however, is a government body, which means that the onus of raising minimum wages is ultimately on the ministry itself.
According to the new regulation, local governments must renew their minimum wage standards at least once every two years, and penalties for violations quintupledâfrom a range of 100 to 500% of the owed wage. Moreover, employers cannot include extra allowances such as overtime pay or food and traveling subsidies as part of an employeeâs wage when calculating the minimum wage.
1.3 Major Findings
This book begins by introducing the evolution and effect assessment of Chinaâs minimum wage policy in Chapter 2, and then, Chapter 3 looks into the standards for and implications of the minimum wage policy. Chapters 4â14 provide research results from various aspects of the labor market: wages, employment, gender and income inequalities, firm investment and profits, compliance, and regional disparities. In particular, we pay special attention to the 168 million ruralâurban migrant workers in China, focusing on the wage and employment impacts they experience as a result of minimum wage policies. Below is a summary of the major findings:
Finding 1: minimum wages helped increase wages but resulted in disemployment for young adults, women, and low-skilled workers
Chapter 4 uses nationally representative survey data from 2002 to 2009 and finds that minimum wage changes in China led to significant negative effects on employment in the eastern and central regions and caused disemployment for young adults and low-skilled workers, which are particularly at-risk groupsâi.e., workers who, at the time of a minimum wage increase, are receiving a wage between the old and new minimum wages. On the other hand, minimum wages in the provinces with vigorous enforcement did increase wages while adversely affecting employment. This trade-off between a minimum wage increase and job protection has been extensively noted and commented upon in the literature.
Finding 2: higher minimum wages reduced the gender wage gap
Chapter 5 provides evidence that min...