Minimum Wages in China: Standard and Implementation

Abstract

This chapter describes the history of the minimum wage system in China and analyzes its enforcement by utilizing various sources of data. In 2010, 13% of workers in the sample earn wages below local minimum wages. This result is worse than most of the developed countries but better than countries with about the same level of economic development as China. Both descriptive statistics and regression analysis indicate that some focused groups of workers ought to be targeted when implementing the minimum wages, including female and less-educated workers. The analysis further indicates that the effect of compliance in minimum wages is not only determined by the effort to enforcement, but also correlated with the level of minimum wages, economic structure, ownership type, labor market conditions, etc. The study also implies that the current minimum wage level in China is in accordance with China’s current stage of economic development, and frequent and large increase of minimum wages should be restrained.

3.1 Introduction

The minimum wage system has been widely accepted in many countries, which makes it one of the fundamental pillars of labor market institutions. The original intention to set up a minimum wage is to intervene in the market wage rate at equilibrium, so the institution per se is regulative. When looking at the compliance of minimum wages, the leakages exist in almost every country, which brings up controversy with the institution regarding its effectiveness and enforcement. Therefore, the policymakers should pay attention to how to design the minimum wage system effectively.

It has been more than two decades since the introduction of minimum wages in China. In the past decade, the minimum wage has been influencing the labor market outcomes. The existing studies focus on its impacts on employment (Ding 2010; Ma et al. 2012), working time (Jia and Zhang 2013a), spillover (Luo and Cong 2009; Jia and Zhang 2013b), and income distribution (Luo 2011). Concerning the minimum wage per se, however, the policymakers should care about whether the minimum wage is effectively enforced and what affects the compliance of minimum wages.

The first message we need to evaluate the implementation of the minimum wage is to look at the share of workers who earn below the minimum wages. Based on the urban household survey data we use in this chapter, in 2010 there is 13.26% of workers whose monthly wages are less than the local minimum wage. The share is 17.26 and 9.84% in 2005 and 2001, respectively. International comparisons indicate that developed countries tend to have good performance in compliance with minimum wages. According to a report by the Bureau of Labor Statistics (2013), in 2012 only 2.6% of workers are reported to work below the federal minimum wages in the United States. Observation of the UK reveals that 1% of workers earn less than minimum wages (Machin et al. 2003).

In contrast, the situation is much more severe in developing countries where informal employment is ubiquitous. In Brazil, 5–10% of formal employment and 15–30% of informal employment are reported wages below minimum wages (Lemos 2004, 2009). The share is about 30% in Honduras (Gindling and Terrell 2010), 16% in Mexico (Bell 1997), and 24% in Peru (Baanante 2004).

In addition to how many, it is also crucial for labor market regulators to know who are not covered by the minimum wage. To target relevant individuals and improve the implementation of minimum wages, it would be of policy implications to understand the characteristics of those who are not covered by the minimum wage and the job characteristics with minimum wage compliance.

The coverage of minimum wages might be the outcome of implementation, but some other factors also affect coverage. First of all, the level of minimum wages per se is related to how easy to implement the institution. It is evident that a high minimum wage produces large targeting groups of workers, which increases the difficulty of enforcement naturally.

Second, the general trend of labor demand and supply affects how easy it would be to implement the minimum wage. In recent years, driven by demographic change and strong labor demand, the shortage of unskilled labor is more and more frequent and the wage rates have been going up quickly. According to the NBS, the average monthly earnings for migrant workers are RMB 2690 in 2013. It is observed the significant trend of wage convergence between migrant and local workers (Cai and Du 2011). In this context, the spontaneous changes in the labor market would improve the coverage even without further efforts to enforcing the minimum wage.

Third, the dynamics of economic restructuring, industrial organization and other labor market institutions could also affect the compliance of minimum wages. For instance, it is easy for employees in manufacturing to have explicit labor relations with their employers, which makes low costs for enforcement. The improvement in other employment institutions affects the implementation too. For example, a more regulated Employment Contract Law would make enforcement in minimum wages easier; the introduction of collective bargaining would facilitate monitoring the minimum wages at the firm level.

To understand the compliance of minimum wages in China, various data sources are applied to evaluate the changes in minimum wages with international comparisons. Using micro-level data, we analyze the coverage of minimum wages and its determinants. The data include the minimum wages at the local labor market, cross-country data, and the China Urban Labor Survey (CULS) conducted by the Institute of Population and Labor Economics in 2001, 2005, and 2010, respectively. The survey was implemented in Shanghai, Wuhan, Fuzhou, Shenyang, and Xi’an. Both local residents and migrants are included in the sample, and the sampling strategy of proportional probability stratification is applied. The sample is representative at the city level. The descriptive statistics and regression are weighted by sampling weights to avoid bias. To meet the purpose of this study, only wage employment is included.

3.2 Minimum Wage Regulations in China

The level of the minimum wage is not only the core element of the minimum wage regulation but also relates to the enforcement and effects of the minimum wage. Although the minimum wage regulation has a history of almost 20 years in China, it is still not very clear at what level should the minimum wage be set, and what factors should be taken into consideration when adjusting minimum wages. These ambiguities have resulted in casualness in setting the minimum wage and increased difficulties in minimum wage enforcement. In this section, we will first review the evolution of minimum wage regulations in China, and then discuss the level and adjustment of minimum wages as well as their relationship with minimum wage enforcement.

3.2.1 Evolution of Minimum Wage Regulations in China

China officially recognized the Minimum Wage-Fixing Machinery Convention in 1984.¹ However, from 1984 to 1992, there was no official minimum wage in China. In 1993, the Chinese Government issued its first minimum wage regulation, the Enterprise Minimum Wage Regulation. This regulation stipulates that a minimum wage can only be modified after it has been effective for at least one year. This regulation requires that local governments set the minimum wage according to local average wage, productivity, unemployment rate, economic development, and minimum living expenses, and all enterprises should comply with this regulation. These conditions provide considerable flexibility for provinces and cities in setting their minimum wages, with the economic development principle giving them the flexibility to restrain minimum wages to attract foreign investment (Wang and Gunderson 2011). The minimum wage regulation was formally established in 1995 when the Labor Law of the People’s Republic of China was set into force. As a result, most provinces in China announced their first monthly minimum wages around 1995.

At the end of 2004, temporary labor shortages in some developed areas caught the attention of policymakers. In the same year, a modified minimum wage regulation, the Minimum Wage Regulation, was adopted. According to this new regulation, the minimum wage should be adjusted at least once every two years. This is a significant improvement over the 1993 regulation. Employers should not include subsidies, such as overtime pay, as part of the wage, when calculating the minimum wage. Penalties for violation of the regulation were increased from 20–100% of the owed wage to 100–500%. A minimum wage per hour that applies to part-time workers was also stipulated in this updated regulation.

The minimum wage regulation was also part of the Labor Contract Law which took effect on May 1, 2008. However, at the end of 2008, the Department of Human Resources and Social Security of China advised local governments against increasing the minimum wage in 2009 in case of possible negative impacts of the international financial crisis. As the influence of the financial crisis waned, there was a new round of minimum wage increases from 2010. In 2010, 30 of 31 provinces increased their minimum wages, with the average increase at 23%.² In each of 2011, 2012, and 2013, 24 provinces increased their minimum wages, and the average increase in each year was around 20%.³ The Chinese Government has also promised to continue this increase in its twelfth five-year plan. In a recent proposal by the National Development and Reform Commission, the Chinese Government has set the goal that by the end of 2015, the minimum wage should reach 40% of the average wage of urban employment persons. It is apparent that China has entered an era of frequent minimum wage adjustments.

3.2.2 The Level of Minimum Wages in China

Unlike many developed economies, China does not set up a universal national minimum wage, while the provincial governments are responsible for minimum wage adjustments in each province. According to the Minimum Wage Regulation of 2004, multiple minimum wages are allowed in the same province. Therefore, to obtain a basic understanding of how the minimum wage standard has been set and increased in China, in this section, we use a two-step weighted approach to calculate the national minimum wage in each year. First, we calculate the average minimum wage in each province in each year using the actual enforcement days of each minimum wage as the weight. Second, we calculate the average national minimum wage using urban employment of each province as the weight.

In Fig. 3.1, we present minimum wage changes in China from 1995 to 2013.⁴ It is evident that both nominal and real minimum wages have been increasing since 1995. However, if we measure minimum wages by relative minimum wages (the ratio of the minimum wage to the average wage, referred to as relative minimum wages hereafter), we will find that the minimum wage in China has been decreasing in recent years. Compared with OECD countries, minimum wages in China are still at a relatively low level. As of 2012, the relative minimum wage in OECD countries was about 35%, while in China this ratio was only 24%.⁵

Fig. 3.1

(Source China Minimum Wage Database [CMWD], available from https://www.chinaminimumwage.org. Note The nominal minimum wage is adjusted by CPI to calculate the real minimum wage, using 1995 as the base year)

Minimum wage increase in China, 1995–2013

Due to the lack of long-term data on average wages from labor force surveys, we used the average wage data published by the National Bureau of Statistics of China (NBS) when calculating the relative minimum wage in Fig. 3.1. However, as pointed out by Du and Wang (2008), the average annual wage published by NBS is based on a labor survey in urban China, and migrant workers and workers in informal sectors, who generally earn less than the average wage, are not adequately represented in the sample. As a result, the official average wage is overestimated, while the relative minimum wage is underestimated.

In fact, if we calculate the relative minimum wage using the average wage from a well-represented sample, we will find that the minimum wage in China is already at a relatively high level (see Fig. 3.2).⁶ The relative minimum wage in China has already reached the target set by the National Development and Reform Commission of China.

Fig. 3.2

(Source The average and median wages are from the three waves of the China Urban Labor Survey [CULS]. The minimum wage data are from the China Minimum Wage Database [CMWD], available from https://www.chinaminimumwage.org)

Relative minimum wages: 2001, 2005, and 2010

For international comparisons, we also collect the latest minimum wage data for 150 countries and calculate the level of minimum wages relative to per capita GDP (see Table 3.1 and Fig. 3.3). From an international perspective, the relative minimum wage and per capita GDP are negatively correlated: High-income countries have a low relative minimum wage, while in low-income countries, the necessary costs of basic living (a proxy for minimum wages) account for a significant proportion of per capita GDP.

Table 3.1 Relative minimum wage and per capita GDP (by the end of 2013)

Fig. 3.3

(Source Per capita GDP is from the World Development Indicator [WDI] database by the World Bank. The 2012 data are used here. The latest available minimum wage is from Wikipedia entry “List of Minimum Wages by Country”, available from http://en.wikipedia.org/wiki/List_of_minimum_wages_by_country. Note Both minimum wages and per capita GDP have been adjusted by purchasing power parity [PPP], published by the World Bank)

The relationship between minimum wages and per capita GDP

As is evident from Fig. 3.3, China is precisely on the fitted curve. If the relationship between the relative minimum wage and per capita GDP is universal, the minimum wage increase in China should not exceed the increase in per capita GDP over the next few years or even longer term. However, it is evident that, as evidenced by Fig. 3.4, the minimum wage increase in China has greatly exceeded the increase in per capita GDP in recent years.

Fig. 3.4

(Source Minimum wage data are from the China Minimum Wage Database [CMWD], available from https://www.chinaminimumwage.org; per capita GDP is obtained from the China Statistical Yearbook 2013. Note All the data have been adjusted by GDP deflator)

The increase of minimum wages and per capita GDP in China

As described above, if we consider the relationship between minimum wages and the stage of economic development, minimum wages in China are already very high, regarding both absolute level and international comparisons. In the current context of economic slowdown, especially when provincial governments tend to use minimum wages as a tool of income redistribution, continued substantial increase of minimum wages may become an essential factor of pushing higher labor cost. If the minimum wage in China continues to increase at 20% in the next few years, it may also generate high pressure on economic growth.

3.2.3 Monthly or Hourly Minimum Wages?

From an international perspective, most developed countries, for example, the United States, the UK, and Canada, only adopt hourly minimum wages. In China, according to the Minimum Wage Regulation of 2004, there are two kinds of minimum wages: the monthly minimum wage and the hourly minimum wage. The monthly minimum wage applies to full-time workers, while the hourly minimum wage applies to part-time workers. Adopting two types of minimum wages have considered the general tradition of paying wages in China, and the proper protection of part-time workers. However, although there are clear regulations on how monthly minimum wages and hourly minimum wages can be transformed into each other, there are still some problems in actual enforcement of two minimum wages.

First, some provincial governments did not pay much attention to the hourly minimum wage. Taking the five cities in CULS as an example, all cities including Shanghai, Wuhan, Shenyang, Fuzhou, and Xi’an significantly increased monthly minimum wages between 2001 and 2005, and between 2005 and 2010 (see Table 3.2). However, although the Minimum Wage Regulation requested local governments to set up an hourly minimum wage in 2004, some cities like Xi’an did not publish hourly minimum wages even in 2005.⁷ Besides, enforcing monthly minimum wages needs to monitor both working time and monthly wages, and enforcing hourly minimum wages needs to distinguish between part-time and full-time jobs. These can all increase the difficulties and complexities of minimum wage enforcement.

Table 3.2 Minimum wages during the three waves of CULS

Second, adopting a monthly minimum wage in China will induce firms to take advantage of the current wage system by increasing workings hours when governments do not well monitor maximum working hour regulation. Jia and Zhang (2013a) find that minimum wage adjustment can increase male weekly working hours, although male employment is not affected.

Third, minimum wage workers have less human capital and bargaining power in the labor market, and they need to work longer hours than non-minimum wage workers. The CULS data indicate that there are apparent differences in weekly working hours among different labor forces (see Table 3.3). Migrant workers have to work longer hours than local workers. Workers with low educational attainment have to work longer hours than workers with relatively high educational attainment. If the working hour is not well monitored by governments, enforcing monthly minimum wages will probably sacrifice the interests of migrant and less-educated workers, whom minimum wage regulations need to protect in the first place.

Table 3.3 Weekly working hours of different labor forces

Finally, part-time workers only account for a small proportion of total urban employment. According to the Labor Contract Law, “part-time labor” means a form of labor for which the compensation is chiefly calculated by the hour and where the employee averages not more than 4 hours of work per day and not more than an aggregate 24 hours of work per week for the same employer. According to this definition and CULS data, hourly minimum wages only apply to 2% of total employment.

As can be inferred from the above analysis, to target the minimum wage workers more effectively and decrease the enforcing difficulties, the Chinese Government should try publishing only an hourly minimum wage, which applies to both full-time and part-time workers.

3.3 The Coverage of Minimum Wages

The fundamental information we need to evaluate the enforcement is to look at how many workers are earning below local minimum wages. According to the Minimum Wage Regulation enacted in 2004, both monthly and hourly rates are adopted where the former is applied to full-time workers and the latter to part-time jobs. Article 2 of Employment Contract Law defines full-time jobs. Based on this definition, we distinguish every job we get from our samples and the application of minimum wages.

3.3.1 Demographics

The demographic determines wages. For the sake of enforcement, the linkages between demographics and wage give an explicit message of who is easy to fall below minimum wage. Based on the three rounds of the household survey, Table 3.4 presents the compliance of minimum wages by gender, education, and age.

Table 3.4 Compliance of minimum wages by demographic

Without controlling for other factors, Table 3.4 indicates that the average wages for females are significantly lower than male. In 2001, average monthly earnings for females are about 78.3% of those of males, and the ratio went up to 80.9% in 2010. Measured by hourly wages, the ratios are 79.9, 82.0, and 82.9% in 2001, 2005, and 2010, respectively. The women are more likely to earn less than the minimum wage since their wages are lower than male workers. In 2001, female workers who earn earnings below the minimum wage are 5.7 percentage points higher than their male counterpart, and the shares are 7.8 and 6.1 percentage points higher in 2005 and 2010, respectively. This significant difference reflects the possible existence of labor market discrimination. More importantly, it provides targeting groups to enforce the minimum wage.

The less-educated workers are always the primary targeting groups for minimum wages. Our sample also indicates a significant difference in coverage among workers with different education. Samples from the three rounds of the survey all indicate the trend of increasing wage with education. When compared to hourly rates, the more educated workers tend to have more advantages. For example, in 2010 the average monthly wage rate for workers with primary education or less is 47.9% of that of workers with college or above. Measured by hourly wages, the former is 41% of the latter. It is evident that less-educated workers are more likely to earn a wage below the minimum wage. Table 3.4 indicates that despite the coverage variations due to adjustment of minimum wages over time, the group of workers with the least education is most likely to fall below the minimum wage. In 2010, 32.5% of workers with primary school or below earned below local minimum wages. For workers with junior high school, the share is 23.8%.

The compliance of minimum wages is also associated with the wage changes over the life cycle. As indicated in Table 3.4, the coverage of the minimum wage shows an inverted U shape with age increase. It is worthwhile to note the coverage for two age groups. The first one is the new labor market entrants whose ages are between 16 and 20. Both their average wage rates and coverage rate are low. In 2010, 18.8 of workers in the group earn a wage rate below the minimum wage. The other interesting group is those aged 50 or above. Although the average wage is not the lowest among groups, they have significant wage variations within groups, as evidenced by high standard deviations in the parenthesis. As a result, we still see a relatively large share of this group of workers earns below the minimum wage.

3.3.2 Hukou

Rural migrant workers have been the indispensable component of labor supply in the urban labor market. According to the NBS, in 2013 the rural migrant workers totaled 166 million, which accounted for 40% of urban employment. With labor market development, hukou has disconnected from employment determination and wage formation gradually, even its link with social protection is still apparent.

Table 3.5 presents the same indicators as Table 3.4, but by hukou status. In 2001 and 2005, local workers have higher average wages. However, with the increasing labor scarcity, wage rates for migrant workers have been proliferating. In 2010, wages for migrant workers were slightly higher than their local counterpart in our sample. This is consistent with observations from aggregated information. According to the NBS, real wage growth per annum for migrant workers is 12.7% between 2007 and 2013, much faster than urban local workers. It is good to believe that the spontaneous changes in labor demand and supply facilitate the compliance of minimum wages in this case even without additional effort to enforcement.

Table 3.5 Coverage of minimum wages: local workers and migrants

The results in Table 3.5 indicate that local workers have better compliance in the case of 2001 and 2005. However, the share of local workers falling below the minimum wage in 2010 is one percentage point higher than migrant workers. It has something to do with the labor market dynamics, which improves the situations of migrant workers. The result is also associated with insufficient social protection of migrant workers. Figure 3.5 depicts the compliance of minimum wages and coverage of social protection for both migrant workers and local workers as well. The left panel reflects the workers working below the minimum wage and the right panel for the above.

Fig. 3.5

(Source Authors’ computation based on CULS data. Note “UI” stands for unemployment insurance, while “WI” stands for injury insurance)

Coverage of minimum wages and social security

Two features of Fig. 3.5 are worth noting. First of all, regardless of compliance with the minimum wage, the coverage of social protection for local workers is much higher than migrant workers. Second, as far as workers working below the minimum wage are concerned, there is an even more significant disparity between migrant workers and their local counterpart.

3.3.3 Sector, Occupation, and Ownership

It is of policy relevance to observe the compliance by ownership or sector. The ownership, occupation, and sectors reflect the job characteristics that are associated with how difficult to enforce the minimum wage. Table 3.6 lists the compliance of the minimum wage by the three dimensions respectively.

Table 3.6 Compliance of minimum wages by sector, occupation, and ownership

For simplicity, the sectors are regrouped into four groups of consumer services, business services, manufacturing, and other sectors. The consumer services include wholesale and retail, education, culture, entertainment and sports, and general services. The business services include production and supply of electricity, heat, gas, and water, transportation and logistics, software and IT, finance, construction, real estate, R & D. Both consumer services and manufacturing are characterized by intensively using labor, as evidenced by low hourly wage rates.

Greater variations in the wage distribution are found in the sectors of consumer services. For example, the coefficients of variation in the sector for monthly and hourly rates are 0.75 and 0.87 respectively while the coefficient is 0.63 in manufacturing. So, the disparity in average wage is small, but the compliance with the minimum wage in consumer service is 10 percentage points below. Thus, it can be seen that the performance of minimum wage enforcement has something to do with the industrial organization. In other words, when manufacturing dominates one city and consumer service dominates another, the outcomes could be different even the local governments take the same effort to enforcement.

It seems that the types of ownership make a difference in compliance too. The employers are grouped as public administration, SOEs, and private sectors. Workers in SOEs have similar average wages to those in the private sector; however, the latter has worse compliance in the minimum wage. In 2010, the share of workers earning below the minimum wage was 6.2 percentage point higher in private sectors than in public sectors.

3.3.4 Informality

Informal sector is always vital for targeting areas to enforce minimum wages. Informal employee is defined as the employees without employment contract or workers who worked in enterprises with less than seven employees. The findings from the three waves of data are indicated in Table 3.7.

Table 3.7 Compliance of minimum wages by informality

First, it is not surprising that significant disparity in compliance with minimum wages exists between formal and informal sectors. In 2010, the compliance in the formal sector was 17.7 percentage points higher than that in informal sectors. Second, with increasing minimum wages over time, the compliance in informal sectors has been deteriorating. The coverage rate in 2010 has fallen 3.9 percentage points from 2001. Third, more heterogeneity is found within informal sectors over time. For instance, the coefficient of variation for monthly wages in the informal sector was going up from 0.64 in 2001 to 0.82 in 2010. The result is consistent with observations in other countries where the informality diversifies with economic development (Andrews et al. 2011). The heterogeneity within informal sectors has been challenging with the enforcement of minimum wages regarding necessity and difficulties. On the one hand, with economic development, some workers might voluntarily choose informal jobs, which brings up the necessity to intervene in the wage through the institution. On the other hand, the heterogeneity of informal employment in job characteristics and job quality makes it more difficult to identify what to enforce in the formal sector, which increases the costs of enforcement.

3.4 Determinants of Minimum Wage Enforcement

In Sect. 3.3, we observe that there are considerable differences in minimum wage coverage among different labor forces. In this section, we will use microdata from the three waves of the CULS to analyze the determinants of minimum wage coverage.

3.4.1 Data

The minimum wage data used in this section are from the China Minimum Wage Database (CMWD), which is available from https://www.chinaminimumwage.org. This database is established by the Institute of Population and Labor Economics, Chinese Academy of Social Sciences. The database contains minimum wages and other labor market indicators of nearly 3000 county-level regions in China from 1993 to the present day.

The micro-level data used in this section are from CULS, which was conducted in 2001, 2005, and 2010 by the Institute of Population and Labor Economics, Chinese Academy of Social Sciences. In the 2001 survey (CULS 1), five cities, Shanghai, Wuhan, Shenyang, Fuzhou, and Xi’an, were sampled. In each city, we interviewed 700 urban households and 600 migrant workers in 70 communities, based on multi-stage random sampling principle. In the 2005 survey (CULS 2), another seven cities, Wuxi, Yichang, Benxi, Zhuhai, Shenzhen, Baoji, and Daqing, were sampled, besides the five cities in CULS 1. We interviewed 500 urban households and 500 migrant households in each city based on the same sampling principle. In 2010 (CULS 3), Guangzhou was added to the survey, besides the five cities in CULS 1. In each city, following the same sampling principle, we interviewed 700 urban households and 600 migrant households.

In this section, to maintain consistency across surveys, we only use data of Shanghai, Wuhan, Shenyang, Fuzhou, and Xi’an, which were sampled in all three rounds. Also, because minimum wage regulations only apply to employees in firms and public institutions, we delete observations whose employment status is employer or self-employment. Besides, according to the definition of “part-time worker” in Labor Contract Law, we also distinguish between full-time and part-time workers.

3.4.2 Model Specifications

In our model, the explained variable is a dummy variable, i.e., whether one’s wage is below the official minimum wage (1 for below or equal to minimum wage, 0 for above the minimum wage). The explained variable is highly related to wage, so the right-hand of the model includes variables that should appear in a typical wage equation. These variables can be classified into three categories: individual demographic and human capital variables, household-level variables, regional and firm-level variables.

Individual demographic and human capital variables include workers’ gender (dummy variable, 0 for female), age, age squared, education in years, training (dummy variable, 0 for no training), and health condition (discrete variable, with 1–4 standing for bad, general, good and very good health condition respectively, using “bad” as the base), etc. Household-level variables include workers’ marital status (dummy variable, 0 for unmarried), number of household members, whether there are children below 6 in the household (dummy variable, 0 for no children below 6), etc.

Regional and firm-level variables include whether the worker holds a local hukou (dummy variable, 0 for non-local hukou), city (discrete variable, using Shanghai as the base), industry (discrete variable, using manufacturing as the base; the definitions of production services and consumer services are the same with Sect. 3.3), types of ownership (dummy variable, using the public sector as the base), and the interaction terms of some variables, etc.

A linear probability model is applied in our analysis. As pointed out by Wooldridge (2010), if the purpose of the research is to study the marginal effects of the explanatory variables, and if most of the explanatory variables only take a few unique values, then the use of a linear probability model is much better, and the problem that some predicted value may fall outside the range [0, 1] should not be concerned. Besides, compared with Probit model, it is straightforward to explain the coefficients of a linear probability model. As a result, in this section, we apply a linear probability model in all regressions.

3.4.3 Regression Results

Table 3.8 presents the regression results of the determinants of minimum wage enforcement under three different specifications. In specification (1), the explanatory variables include the city dummies, the industry dummies, and the ownership dummies, but don’t include the interaction terms of them. In specification (2), the explanatory variables include the interaction terms of these dummy variables, but don’t include the variables separately. In specification (3), the explanatory variables include both the dummy variables and their interaction terms.

Table 3.8 Determinants of the minimum wage coverage

After controlling other factors, the minimum wage coverage for females is still worth than male in all three specifications. This may be partially caused by the fact that the average female wage is lower than male. This may also reflect discrimination again female in labor market, and minimum wage protections for females are not enough. In 2005, the coefficients of age and age squared imply an inverse U relationship between minimum wage coverage and age, i.e., younger and older individuals tend to be less likely covered by the minimum wage, which is consistent with our analysis in Sect. 3.3.

More education tends to decrease the possibility that one’s wage will fall below the minimum wage. The contribution of training to wage determination is becoming more and more important in recent years. Better health conditions have a positive impact on wage. Education, training, and health condition are all core elements of human capital, and they all contribute positively to wage, which is consistent with human capital theory.

In all three specifications, household-level variables have little effects on wage. However, married individuals with children have higher responsibilities for their families. As a result, they have to work much harder and hold a more stable job and may be less likely to fall below the minimum wage.

In 2001 and 2005, the average wage of migrant workers was lower than local workers. However, in 2010, migrants’ average wage became slightly higher than local workers. As we discussed in Sect. 3.3, the role of market forces is becoming more and more important in wage determinations in recent years, due to the lack of migrant workers. However, if we consider the differences in social protections between local and migrant workers, we will find that the actual income of migrant workers is still lower than local workers. In Table 3.9, we present the differences in social protections between local and migrant workers.

Table 3.9 Social protections of local and migrant workers (%)

In general, migrant workers are better covered regarding social insurance as time goes on, although the percentage of covered migrant workers is still lower than local workers. Besides, the improvement of social protection for migrant workers is mainly contributed by migrant workers who earn above minimum wages, and the proportion of migrant minimum wage workers covered by social protection is still tiny. In fact, the percentage of migrant minimum wage workers covered by unemployment insurance and working injury insurance declined in 2010 compared with 2005.

Most cities have worth minimum wage coverage than Shanghai. A higher minimum wage coverage implies greater efforts by local labor inspection agencies in enforcing minimum wage regulation. However, as nominal minimum wages are related to the local price level, a seemingly high minimum wage does not necessarily represent strong labor market interventions by local governments. As a result, the enforcing difficulties of minimum wage regulations have no direct connections with nominal minimum wages. In Table 3.2, Shanghai has the highest nominal monthly minimum wages and nominal hourly minimum wages. However, if we adjust nominal minimum wages by spatial price indices (SPI), which is proposed by Brandt and Holz (2006), to calculate a minimum wage which is comparable among regions, then minimum wages in Shanghai is no longer the highest one (Table 3.10). In 2010, Shenyang and Wuhan have higher minimum wage standards than Shanghai, and as a result, the enforcement is more difficult, and the coverage rate is lower.

Table 3.10 Minimum wage standards during the CULS surveys (SPI adjusted)

3.4.4 Decomposition of Changes in Minimum Wage Enforcement

In this section, we decomposed the changes in minimum wage coverage using the Blinder-Oaxaca method (Blinder 1973; Oaxaca 1973). In Table 3.11, the minimum wage coverage decreased from 2001 to 2005, while the coverage increased from 2005 to 2010. We decompose these changes into three effects: the endowment effect, the return effect, and the interaction effect. The endowment effect represents the changes in the minimum wage coverage because of different sample characteristics in different years. The return effect represents the changes in the minimum wage coverage because of changes in coefficients of sample characteristics in different years. The interaction effect is the changes in the minimum wage coverage because of changes in both sample characteristics and their coefficients.

Table 3.11 Decomposition of changes in the minimum wage coverage

In Table 3.11, under all three specifications and in all three years, the endowment effects are all positive, while the return effects are all negative and the interaction effects are all minimal. The positive endowment effects imply that better individual, household, regional and firm-level characteristics tend to increase the minimum wage coverage. The adverse return effects indicate that the wage return to the individual, household, regional and firm-level characteristics is declining, and thus can decrease the minimum wage coverage. More specifically, from 2001 to 2005, the return effect was higher than the endowment effect, and as a result, the minimum wage coverage decreased; from 2005 to 2010, the endowment effect was more significant than return effect, and as a result, the minimum wage coverage increased.

In the endowment effect, human capital has the most substantial contribution, while the contribution of household constraints and regional and firm-level characteristics are very small or even negative. In the return effect, although the net effect is negative, the return to human capital is still positive and increasing, and the negative return effect is mainly caused by the decrease of return to regional and firm-level characteristics, which indicates that the differences in wage level and minimum wage coverage caused by household registration, region, industry, and ownership type tend to decrease.

As described above, human capital tends to increase the coverage of minimum wage regulations, regarding both endowment effect and return effect. As a result, by promoting education, training and medical services, workers can acquire more return from the labor market, and the pressure of enforcing the minimum wage regulation can also be eased.

3.5 Conclusions

Taking advantage of various sources of data, this chapter describes the evolution of the minimum wage system in China and analyzes its enforcement. In 2010, 13% of workers in our sample earned wages below local minimum wages. This result is worse than most of the developed countries but better than countries with about the same level of economic development as China.

Our analysis indicates that the effect of compliance in minimum wages is not only determined by the effort to enforcement but correlated with many other factors. When the demand for labor is robust, and the demographic transition has more and more constrained labor supply, wages for unskilled workers have been growing rapidly. In this case, the difficulty of enforcement reduces due to the natural forces in the labor market. Also, more regulated labor market institutions, like the Employment Contract Law, facilitate to enforcement the minimum wage.

Using urban household survey data, this chapter examines the coverage of minimum wages. Both descriptive statistics and regression analysis indicate that some focused groups of workers ought to be targeted when implementing the minimum wages, including female and less-educated workers. Meanwhile, the significant disparity in returns to human capital implies that in the long run improving job quality is the fundamental means to better enforcement.

The empirical analysis in this chapter also indicates that the variation of enforcement might simply put in a nutshell of different efforts in enforcement among regions. Controlled for individual characteristics, we do find that in the early period the coastal cities had better performance in compliance with minimum wages. However, the most recent data also indicate that the regional disparity would disappear if the ownership and economic structure of the regions are controlled. This implies that the difference in economic structure and development could give rise to compliance among regions.

Notes

• 1. The Minimum Wage-Fixing Machinery Convention was established in 1928 by the International Labor Organization (ILO).

• 2. This value is calculated by the author based on the China Minimum Wage Database.

• 3. This value is calculated by the author based on the China Minimum Wage Database. In 2013, only minimum wage adjustments in the last three quarters were considered.

• 4. Although minimum wage regulation was first introduced in 1993, most provinces issued their first minimum wages in 1995. That is why we do not report a national minimum wage before 1995 in Fig. 3.1.

• 5. According to the China Minimum Wage Database, the annual minimum wage in 2012 was 11438 RMB. According to the China Statistical Yearbook 2013, the annual average wage of urban employees in 2012 was 46769 RMB. As a result, the relative minimum wage is 24% for 2012.

• 6. For Fig. 3.3, the average wage is calculated from the China Urban Labor Survey, which was conducted by the Institute of Population and Labor Economics, Chinese Academy of Social Sciences, in 2001, 2005, and 2010. For more details of the survey, please visit http://iple.cass.cn/cate/1103.htm.

• 7. Some provinces have been publishing hourly minimum wages since 1995, when the Enterprise Minimum Wage Regulation was first introduced. However, this hourly minimum wage is calculated directly from monthly minimum wage (a typical worker generally works four weeks per month and 20.92 hours per week) and is very different from hourly minimum wage that applies to part-time workers. After the Minimum Wage Regulation of 2004 was set into force, most provinces stopped publishing the calculated hourly minimum wage.