Effects of Minimum Wage Hikes on the Formalization of Employment

Zhang Jun (张军),Zhao Da (赵达) and Zhou Longfei (周龙飞)
Abstract: Despite the intention of minimum wage policy to maintain the living standards
of low-income groups in the formal sector, this paper has found that the actual result of
this policy produces the “big push” impact on Chinas economy under certain conditions,
i.e. it is conducive to achieving the equilibrium of high wage, high consumption and
formalization. The result shows that the elasticity of income growth from raising the
minimum wage standard is greater for formal sector employees than for informal sector
employees and is characterized by a U-shaped pattern in terms of quantiZes. Thus, minimum
wage hikes have widened wage gaps between and within sectors. Rising minimum wage
standards greatly stimulate consumption with each 10% increase expected to bring about an
additional urban household consumption of about 1.167 billion yuan in the surveyed four
provinces. With local minimum wage hikes, the formal sector of wholesale and retail, hotel
and catering services expands and the informal sector contracts, while the real estate sector
experiences a “reverse formalization” trend. Based on the “big push theory”, this paper
concludes that against the backdrop of extensive, frequent and substantial minimum wage
hikes, demand and sector TFP growth are the major causes of sector heterogeneity.
Keywords: minimum wage standards, employment formalization of informal sectors, TFP,
product demand
JEL Classification: J68, L52, L51

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