The minimum wage and the locations of new business entries in China: Estimates based on a refined border approach

Abstract

This paper studies how the local adjustments of minimum wage levels in China affect the locations of new business entries. We use a refined border approach to address the endogeneity concerns regarding local minimum wage levels and examine whether differential changes in minimum wage levels on both sides of a county border result in abrupt changes in business entries within short distances from the border. Our results suggest that a 10% increase in the minimum wage levels decreases business entries by 2.69%. This effect is magnified for industries that pay lower average salaries or employ a larger share of unskilled workers. The entry-discouraging effects of high minimum wage levels are stronger when closer to the border where the identification assumption of the border approach is the most likely to hold and gradually decrease as we expand the widths of the border areas. Moreover, although we expect businesses could move across county borders at relatively low costs to avoid high minimum wage levels, we find that business relocation is rare and does not significantly respond to changes in the cross-county difference in minimum wage levels.