The enforcement of the Minimum Wage Policy in China and firm cost stickiness

In the light of drawbacks in prior studies exploring the adjustment costs driver of cost stickiness, this paper dynamically examines how the 2004 Minimum Wage Policy (MWP) affects cost stickiness in Chinese firms through its immediate effect on increased hiring costs. The results show that cost stickiness weakens after the enforcement of the 2004 MWP. Further evidence shows that, in SOEs and firms with low average wages, in labour-intensive industries, and in regions with low marketisation level, the effect of the 2004 MWP on firm cost stickiness strengthens. The paper not only overcomes the drawbacks in terms of reverse causality and alternative explanations in prior studies, but also provides insight on how raising China's minimum wage could affect firm hiring costs, employment, and thus cost management, which helps improve China's MWP.