Highlights :

• We study how the 2004 reform of minimum wage rules in China has affected the survival, average wage, employment and productivity of local firms.
• For surviving firms, wage costs increased without negative repercussions on employment. The main explanation for this finding is that productivity significantly improved, allowing firms to absorb the cost shock without hurting their employment nor their profitability.
• Minimum wage growth allows more productive firms to replace the least productive ones and forces incumbent firms to strengthen their competitiveness, these two mechanisms boosting the aggregate efficiency of the economy.

 Abstract :
We study how the 2004 reform of minimum wage rules in China has affected the survival, average wage, employment and productivity  of local firms.  To identify the causal effect of minimum wage growth, we use firm-level data for more than 160,000 manufacturing firms active in 2003 and complement the triple difference estimates with an IV strategy that builds on the institutional features of the 2004 reform. We find that the increase in city-level minimum wages resulted in lower survival probability for firms that were the most exposed to the reform. For surviving firms, wage costs increased without negative repercussions on employment. The main explanation for this finding is that  productivity significantly improved, allowing firms to absorb the cost shock without hurting their employment nor their profitability. At the city-level, our results show that  higher  minimum wages fostered aggregate productivity  growth thanks to productivity  improvements of incumbent firms and net entry of more productive ones. Hence, in a fast-growing economy like China, there is a cleansing effect of labor market standards. Minimum wage growth allows more productive firms to replace the least productive ones and forces incumbent firms to strengthen their competitiveness, these two mechanisms boosting the aggregate efficiency of the economy.

 Keywords : minimum wages | firm-level performance | aggregate TFP | China

 JEL : F10, F14, O14