THE MINIMUM WAGE, INEQUALITY AND EMPLOYMENT IN CHINA by RUOSI LU A thesis submitted to the University of Birmingham for the degree of DOCTOR OF PHILOSOPHY Department of Management Birmingham Business School College of Social Sciences University of Birmingham October 2015 University of Birmingham Research Archive e-theses repository This unpublished thesis/dissertation is copyright of the author and/or third parties. The intellectual property rights of the author or third parties in respect of this work are as defined by The Copyright Designs and Patents Act 1988 or as modified by any successor legislation. Any use made of information contained in this thesis/dissertation must be in accordance with that legislation and must be properly acknowledged. Further distribution or reproduction in any format is prohibited without the permission of the copyright holder. ABSTRACT This study looks at the welfare implications of the minimum wage in China, and covers three topics: the minimum wage and wage inequality, the minimum wage and employment, and the minimum wage and the gender wage gap. The main finding is that the welfare implications of the minimum wage in China are mixed, with both positive and negative welfare effects. Four main conclusions are reached. Firstly, minimum wages can effectively reduce overall wage inequality at the municipal level (despite non-compliance) through raising individual wages at the lower end of the wage distribution. Secondly, minimum wages generally have significantly negative effects on urban employment with some indication of more marked effects for traditionally disadvantaged groups such as youth, older workers, and women. Thirdly, minimum wages significantly raise women’s wages relative to men’s at the lower quantiles of wage distribution, thus reducing the gender wage gap. Together with the second result, this means that the minimum raises women’s relative wages, while lowering their employment. Fourthly, these three results are especially robust during 2004-2007, when the minimum wage system was reinforced. Specific point estimates found in this study are as follows. As regards minimum wage impacts on wages, we find that a 10% increase in the minimum wage raises the wage at the 10th percentile by up to 6%, and also reduces the 10-60 wage gap by almost 10%. Given such significant wage effects, we expect employment effects, and find that elasticity of employment with respect to the minimum wage for compliant workers is about -0.2 pre- 2004 and -0.3 post-2004. The figure for compliant youth is higher, approximately -0.4 pre- 2004 and -0.8 post-2004. However, we also find that the negative employment effects for compliant workers are counterbalanced to some extent by significant positive effects for the non-compliant. Overall employment effects therefore appear small for most groups, though the minimum wage causes crowding into non-compliant jobs. DEDICATION To My Grandfather in Heaven ACKNOWLEDGEMENTS I am very grateful to my supervisor, Prof. Stanley Siebert, and my vice supervisor, Prof. Xiangdong Wei, for all their invaluable guidance and help during my PhD study. My respect and gratitude to them is beyond expression. I would like to thank very much the Website of China Labour Consultation (zhongguo laodong zixun wang, www.51labour.com). This business website opened its data to me for free after I presented my research plan on the minimum wage. Thank you for your generous help. Thanks go to professors and my friends at the University of Birmingham and Lingnan University for their help and precious kindness during my most difficult times. I greatly appreciate my parents and husband’s support in taking care of my babies for me, especially my dearest father, Zaixin Lu. Last but not the least, thanks go to my two babies: Xingkan and Xingyi; you are both gifts from God, granting me courage and strength to overcome all difficulties. TABLE OF CONTENTS TABLE OF CONTENTS .............................................................................................................. I LIST OF FIGURES .................................................................................................................... III LIST OF TABLES ...................................................................................................................... IV LIST OF APPENDICES ........................................................................................................... VII ABBREVIATIONS .................................................................................................................. VIII CHAPTER 1: INTRODUCTION ................................................................................................ 1 1.1 Institutional background ..................................................................................................... 2 Administrative and regional characteristics ...................................................................... 3 The labour market .............................................................................................................. 4 The minimum wage system ............................................................................................... 7 1.2 Research advantages, contributions and findings ............................................................. 11 1.3 Thesis structure ................................................................................................................. 13 CHAPTER 2: LITERATURE REVIEW .................................................................................. 15 2.1 Introduction ...................................................................................................................... 15 2.2 The minimum wage and wage inequality ......................................................................... 16 The minimum wage and inequality in developed countries ............................................ 17 The minimum wage and inequality in developing countries ........................................... 24 The minimum wage and inequality in China................................................................... 26 Conclusions on inequality ............................................................................................... 27 2.3 The minimum wage and employment .............................................................................. 28 The minimum wage and employment in developed countries ........................................ 29 The minimum wage and employment in developing countries ....................................... 31 The minimum wage and employment in China............................................................... 33 Conclusions on employment effects ................................................................................ 44 2.4 The minimum wage and the gender wage gap ................................................................. 44 The gender wage gap in China ........................................................................................ 45 The minimum wage effect on the gender gap ................................................................. 48 2.5 Conclusion ........................................................................................................................ 50 Figures and tables ................................................................................................................... 52 CHAPTER 3: DATA.................................................................................................................... 55 3.1 Introduction ...................................................................................................................... 55 3.2 Data of the Urban Household Survey ............................................................................... 57 An overview of UHS data ............................................................................................... 57 UHS data used in this study ............................................................................................. 60 3.3 Data on minimum wages .................................................................................................. 62 3.4 Covariates and statistics ................................................................................................... 66 Combination .................................................................................................................... 66 The minimum wage ......................................................................................................... 67 Other covariates ............................................................................................................... 69 3.5 Conclusion ........................................................................................................................ 72 Figures and tables ................................................................................................................... 74 Appendices ............................................................................................................................. 79 CHAPTER 4: THE MINIMUM WAGE AND WAGE INEQUALITY .................................. 85 I 4.1 Introduction ...................................................................................................................... 85 4.2 Compliance ....................................................................................................................... 86 An overview of compliance ............................................................................................