This paper studies how minimum wage policies affect capital investment using the industrial census of manufacturing firms in China, where minimum wage policies vary across counties. Exploiting minimum wage policy discontinuities at county borders, we find that minimum wages increase capital investment. The investment response to minimum wages is stronger for firms that are labor-intensive, that have more room for technological improvement, and that cannot sufficiently pass on labor costs to consumers. A natural experiment based on county jurisdictional changes further assures the causal relationship.
We thank Renee Adams, Chun Chang, Luke Chu, Jennifer Conrad (the editor), Jan Feld, Richard Freeman, Eric French, Matthew Gustafson (the referee), Wei Huang, Oğuzhan Karakaş, Bibo Liu, Yao Lu, Claudio Michelacci, Marco Pagano, Vincenzo Quadrini, Hélène Rey, Rui Shen, Tao Shen, Qi Sun, Paolo Volpin, Michael Weber, Wei Xiong, Haichun Ye, and the conference and seminar participants at Auckland University of Technology, Chinese University of Hong Kong (Shenzhen), the Graduate Institute of Geneva, Harvard University, Labor and Finance Working Group, NBER workshop, 2017 SFS Cavalcade Asia-Pacific, Shanghai University of Finance and Economics, Swiss Finance Institute, and Tsinghua University for their helpful comments. The work described in this paper was partially supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region, China (Project No. T35/710/20R).