Minimum Wage Effects On Employment And Income Distribution

Study on minimum wage effect is one of the most controversial topics in labor economics. Inthis doctoral thesis, we will first do an extensive review of both theoretical and empirical studies onminimum wage. We will then analyze minimum wage effects on employment, wages and incomedistribution in China's urban labor market using micro econometric methods.Many governments around the world have reached a consensus on minimum wage's role inensuring basic living standard of low income groups. There have been many supporters andopponents of minimum wage policy since it was introduced. And every time government plans toincrease minimum wage, economists will debate on its possible effects. According to laboreconomics theory, introduction of minimum wage will reduce employment in a competitive labormarket. However, minimum wage will increase employment in a monopsony labor market if theinitial minimum wage is not high. Minimum wage also has spike and spillover effects on wagedistribution in a search and matching model of labor market, and thus it will also affect wageinequality and income distribution. In general, economic theories fail to provide a consistentprediction on the direction of minimum wage effects. As a result, thess questions should beanswered empirically. There are many empirical studies on minimum wage effects in developedcountries. However, differences in empirical results are clear. There is a long way to go foreconomists to reach a consensus on this matter.Since China issued its first minimum wage, economists have not paid much attention to itseffects, and there are only a few theoretical and empirical studies on minimum wage in China.Recently, because minimum wage increase is much larger and interval between two minimumwage increases is much shorter, we can no longer ignore its possible effects. Because of theless-developed nature of China's urban labor market, minimum wage effects in China may bedifferent from western countries. Based on concrete conditions in China, it is necessary to studyminimum wage effects on employment, wages and income distribution and propose policyrecommendations on setting proper minimum wage standard, improving employment and adjustingincome distribution.First, we consider minimum wage increase as a natural experiment and apply regressionadjusted difference in differences model in the analysis of minimum wage effects on employmentof both young and middle-aged low-skilled workers. The results show minimum wage increase hasno impact on employment of low-skilled male and young female. However, it does have negativeimpact on employment of middle-aged low-skilled female; the larger the increase, the greater the negative impact. As middle-aged low-skilled female only account for a small proportion of urbanlabor force, minimum wage increase has no impact on employment as a whole. As a result, byproperly increasing minimum wage, government can help increase wages of low-skilled workers asa whole. As for middle-aged low-skilled female, local governments can alleviate its negative effectsby providing job training and public employment positions.Secondly, using micro datasets from China Health and Nutrition Survey 1997 to 2009 andminimum wage adjustment data at provincial level, and by controlling for individual heterogeneityin the wage and working hour equation, we study minimum wage effects on labor supply oflow-income workers in a regression discontinuity design setting. The results show minimum wageincrease has no impact on male employment and working hour, and it also has no impact on femaleworking hours. However, it does have negative impact on female employment, and female laborsupply is reduced as a result. Male employment as well as male and female working hour allincrease with relative wages. In conclusion, to ensure labor supply of low income workers is notseriously affected while their wages are increased, local governments should make sure thatminimum wage increase be an appropriate and progressive process.Thirdly, by using micro data from China Health and Nutrition Survey 1997 to 2009 andminimum wage adjustment data at provincial level, we study the spillover effects of minimumwage increase on wages and employment of low-income workers. The results show there is clearevidence of minimum wage spillover on both male and female wages. These spillover effects canreach to 1.50 and 1.25 times of minimum wage on male and female wage distribution respectively.Spillover effects on male and female wages tend to decrease with relative wage. Minimum wageincrease also has positive net effects on male and female employment. As minimum wage in Chinais relatively low, local governments should continue increaing minimum wage properly to increasethe proportion of wages in national income distribution, to increase the proportion of labor incomein initial distribution and to restrain income disparity of urban residents from increasing.Fourthly, we study minimum wage effects on wage inequality using micro datasets from 1995to 2008. The results show wage inequality in urban market is increasing in recent years. At thesame time, minimum wage to average wage ratio is decreasing. Wage inequality increase is mainlycaused by latent wage inequality increase, and minimum wage only contributes to 20% of thisincrease. As minimum wage to average wage ratio is relatively low, there is still large space ofminimum wage increase in China. By increasing minimum wage properly, local government canmake sure employment is not seriously affected. At the same time, it can also increase wage levelof low-income workers, adjust income distribution and restrain wage inequality from expanding.Finally, based on a social accounting matrix and micro datasets from Chinese HouseholdIncome Project, we build a computable general equilibrium model and a microsimulation. We thenlink macro and micro models using Top-Down/Bottom-Up method to analyze minimum wage effect on income distribution. The results show minimum wage increase will reduce incomeinequality, and the large the increase, the larger the deduction. However, as minimum wageincrease gets larger, its negative impact on employment of low-income workers will surface. As aresult, deduction of income inequality may be accompanied by decrease in average income andtotal income.The results in this paper may help us understand the mechanism of minimum wage effects inChina's urban labor market. It may also help government design and implement more proactiveemployment policy and perfect income distribution systems in China.