The Enforcement Of The Minimum Wage Policy And Firm Cost Stickiness

In light of drawbacks in prior studies exploring the adjustment costs driver of cost stickiness, this paper dynamically examines the effect of the 2004 Minimum Wage Policy on firm cost stickiness in China, using the balanced financial data of China’s listed company in Shenzhen and Shanghai main board from 2000 to 2007, as the new policy increases firm hiring costs.Cost stickiness research is an important research field of management accounting research. Among the driving factors of cost stickiness, adjustment cost is an important factor that causes firm cost stickiness, while the research based on adjustment cost theory commonly has drawbacks of reverse causality(ABJ, 2003) and alternative explanations(Banker et al., 2013). Testing the effect of China Employment Contracts Law enforced in 2008 on firm cost stickiness afterwards, Liu and Liu(2014) solved those drawbacks in a certain degree while whether the enforcement of China Employment Contracts Law in 2008 increases or decreases firm cost stickiness is still ambiguous. Meanwhile, Liu and Liu’s conclusion is affected by the financial crisis in 2008, which is also an important alternative explanation. Because after the outbreak of financial crisis in 2008, with the Chinese government issuing policies in order to keep economy and employment steady, firms, especially state-owned entrepreneurs, had more social cost when they tried to lay off the employment. This situation could possibly increase the firm cost stickiness(Ma and Zhang 2013). Thus, it is hard to say that increasing of firm cost stickiness is due to the enforcement of China Employment Contracts Law or financial crisis.Based on the angle of enforcement of Minimum Wage Policy in 2004, this research finds out that, after the enforcement, Chinese firms reduces the employment cost when sales volume goes up, as the policy increases the employment cost; When sales volume goes down, in order to reduce the layoff cost, managers would keep the slack resources such as redundant employees, and leads to weakening the firm cost stickiness. Further, the results show that, cost stickiness weakens after the enforcement of the 2004 Minimum Wage Policy. Further evidence shows that, in state-owned entrepreneurs and firms with low average wage, in industries with high labor intensity, and for regions with low marketization level, the effect of the 2004 Minimum Wage Policy on firm cost stickiness strengthens.This paper not only contributes to the prior literature on drawbacks of reverse causality and alternative explanations, but also provides insight on the effect of increase in minimum wage on firm hiring costs, employment, and cost management, and thus provides empirical evidence for improving the Minimum Wage Policy.