How do firms respond to minimum wage regulation in China? Evidence from Chinese private firms

•We explore how private firms respond to minimum wage hikes in China.•Private firms in China respond to minimum wage increases by cutting various fringe benefits such as pension and insurance, and by laying off low-skilled workers and short-term workers.•Firms cannot fully mitigate the detrimental effects on firm profitability when faced with adverse demand shocks.•This study highlights the unintended consequences of minimum wage regulation.

To study how firms respond to minimum wage regulation in China, this paper empirically explores a number of dimensions along which firms adjust in response to minimum wage differences, using three waves of a national survey of Chinese private firms. Consistent with the predictions of economic theory, we find that private firms in China respond to minimum wage increases by cutting various fringe benefits such as pension and insurance, and by laying off low-skilled workers and short-term workers. Despite these adjustments, firms cannot fully mitigate the detrimental effects on firm profitability when faced with adverse demand shocks because of the wage rigidity introduced by minimum wage regulation. These findings highlight the unintended consequences of minimum wage regulation on the private sector in China.