Seminar on "Minimum Wage and Corporate Investment"

This paper studies the effects of minimum wages (MWs) on corporate investment decisions using census data of Chinese manufacturing firms over the 1998-2008 period. In China, MW policies vary across more than 2,800 counties. We exploit the MW policy discontinuities at county borders and explore how MWs affect firms located around shared borders of any two adjacent counties that are subject to different MWs. We find that corporate investments increase as a result of MW hikes. The effect is stronger for firms that are labor-intensive, that cannot sufficiently pass labor cost on to consumers, that have better access to finance, and that are located in regions with better contract enforcement. Our findings are explained by a capital-labor substitution hypothesis: firms make more investments in fixed assets and adopt new technologies to offset growing labor costs caused by the higher wage floor. We also document a positive effect of MWs on long-term debts, suggesting the increase in investment is externally financed.

LIU Sibo is a Ph.D. candidate in Finance at the University of Hong Kong. He received his M.Phil. Degree from Lingnan in 2014. His research interests include law and finance, innovation, and entrepreneurial finance. His works appear in major finance conferences, such as WFA, SFS Cavalcade, EFA and etc.