Minimum Wages and Income Inequality in Urban China

The minimum wage has been regarded as an important element of public policy in reducing poverty and income inequality. Increasing the minimum wage is supposed to raise incomes for million low-wage workers, therefore, leading to lowering income inequality. However, there is no consensus in the existing literature from industrialized countries about whether the minimum wage has contributed to lowering income inequality. Studying the impact of the minimum wage on income distribution in developing countries such as China is more complicated due to the presence of the large informal sectors in urban areas, large pools of surplus labor in the countryside, and difficulties in ensuring compliance with such legislative initiatives. China has exhibited rapid economic growth and widening income inequality in recent years. Since China promulgated new minimum wage regulations in 2004, the magnitude and frequency of changes in the minimum wage have been substantial, both over time and across jurisdictions. The growing importance of this topic of the relationship between the minimum wage and income inequality and its controversial nature have sparked heated debate in China, highlighting the importance of rigorous research to facilitate evidence-based policy making. We investigate the contribution of minimum wages to the well-documented rise in income inequality in China over the period of 2002 to 2009 using county-level minimum wage panel data and a representative Chinese household survey, finding that the increase of minimum wages has beneficial effects on the income distribution—particularly reducing the income gap between the median and the bottom decile—over the period of analysis