Wage determination and fixed capital investment in an imperfect financial market: the case of China

Gu, Tao (2019): Wage determination and fixed capital investment in an imperfect financial market: the case of China.

Abstract

The purpose of this paper is to examine how wage decisions and fixed asset investments are determined under China’s imperfect financial market. In addition, we also investigate what kind of interrelationship exists between wage determination and fixed asset investment. To test the hypothesis, we collect aggregate data on wages, the financial market, and fixed asset investment by province, sector, and ownership type from several statistical yearbooks. The main results are (1) while the rise in financial market maturity has led to rising wage levels for state-owned enterprises, this phenomenon is not observed in the private sector, (2) retained earnings are positively correlated with capital investment, indicating that China’s financial market is incomplete. Furthermore, in the private sector, there is a strong reliance on internal reserves that is not observed in the state-owned sector, suggesting that the private sector is differentially treated in the financial market. (3) In the state-owned sector, wage growth has a positive correlation with fixed assets, while in the nonstate-owned sector this relationship is not observed. This implies that in the nonstate-owned sector the underpayment of wages may be used as a survival strategy to conduct business if under financial constraints.

• Item Type: MPRA Paper
• Language: English
• Keywords: Imperfect financial market, Fixed capital investment, Wage determination
• Subjects: G - Financial Economics > G1 - General Financial Markets > G10 - General; G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs

References

Agrawal, A. and Matsa, D. A. (2013) Labor unemployment risk and corporate financing decisions. Journal of Financial Economics 108, 449–470.

Allayannis, Y., & Muzomdar, A. (2004) The impact of negative cash-flows and influential observations on investment–cash flow sensitivity estimates. Journal of Banking and Finance, 28, 901−930.

Allen, Franklin, Qian, Jun, Qian, Meijun (2005) Law, finance and economic growth in China. Journal of Financial Economics 77 (1), 57–116.

Alonso-Borrego, César, Arellano, Manuel (1996) Symmetrically normalized instrumental-variable estimation using panel data. Journal of Business and Economic Statistics 17, 36–49.

Arellano, Manuel (2002) Modelling Optimal Instrumental Variables for Dynamic Panel Data Models. Econometrics Invited Lecture, European Meeting of the Econometric Society, CEMFI Working Paper No. 0310.

Arellano, Manuel, Bover, Olympia (1995) Another look at the instrumental variable estimation of error-components models. Journal of Econometrics 68 (1),29–51.

Ayyagari, M., Demirgüç-Kunt, A., Maksimovic, V. (2010) Formal versus informal finance: evidence from China. Review of Financial Studies, 23, 3048–3097.

Bakke, T.-E. and Whited, T. M. (2012) Threshold events and identification: a study of cash shortfalls. Journal of Finance 68, 1083–1111.

Barnett, S. and R. Brooks (2006) “What’s Driving Investment in China?” IMF Working Paper No. 06/265.

Beck, T., Demirguc-Kunt, A., & Maksimovic, V. (2005) Financial and legal constraints to firm growth: Does size matter? The Journal of Finance 60, 1(02), 137−177.

Benmelech, E., Bergman, N., and Enriquez, R. (2012) Negotiating with labor under financial distress. Review of Corporate Financial Studies 1, 28–67.

Blundell, Richard, Bond, Stephen (1998) Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics 87 (1), 115–143.

Bond, S., & Meghir, C. (1994) Dynamic investment models and the firm's financing policy. Review of Economic Studies, 61(2), 197−222.

Cantor, R. (1990) Effects of leverage on corporate investment and hiring decisions. Quarterly Review, Federal Reserve Bank of New York 15, 31–41.

Chodorow-Reich, G. (2014) The employment effects of credit market disruptions: firm-level evidence from the 2008–09 financial crisis. Quarterly Journal of Economics 129, 1–59.

Chow, C.K.W., Fung, M.K.Y. (1998) Ownership structure, lending bias, and liquidity constraints: evidence from Shanghai's manufacturing sector. Journal of Comparative Economics 26, 300–316.

Demir, F., & Dahi, O. S. (2011) Asymmetric effects of financial development on South–South and South–North trade: Panel data evidence from emerging markets. Journal of Development Economics, 94(1), 139-149.

Démurger, S., Li, S., & Yang, J. (2012) Earnings differentials between the public and private sectors in China: Exploring changes for urban local residents in the 2000s. China Economic Review, 23(1), 138-153.

Ding, Sai, John Knight, and Xiao Zhang (2019) “Does China overinvest? Evidence from a panel of Chinese firms” The European Journal of Finance 25, 489-507.

Dong, X., Y., and L., Putterman (1996) China’s rural industry and monopsony: an exploration. Pacific Economic Review, 1, 59-78.

Dong, X., Y., and L., Putterman (2000) Pre-reform industry and state monopsony in China. Journal of Comparative Economics, 28, 32-60.

Dong, X., Y., and L., Putterman (2002) China’s State-Owned Enterprises in the First Reform Decade: An Analysis of a Declining Monopsony. Economics of Planning, 35, 109–139.

Duygan-Bump, B., Levkov, A., and Montoriol-Garriga, J. (2015) Financing constraints and unemployment: evidence from the Great Recession. Journal of Monetary Economics 75, 89–105.

Fazzari, S., Hubbard, G., & Petersen, B. (2000) Investment cash flow sensitivities are useful: A comment on Kaplan and Zingales. Quarterly Journal of Economics, 115 (2), 695−712.

Fleisher, Belton, M., Yifan, Hu, Haizheng, Li, and Seonghoon, Kim (2011) Economic transition, higher education and worker productivity in China. Journal of Development Economics, 94, 86-94.

Fleisher, Belton, M., and Xiaojun, Wang (2004) Skill differentials, return to schooling, and market segmentation in a transition economy: the case of mainland China. Journal of Development Economics, 73, 715–728.

Ge, S., & Yang, D. T. (2011) Labor market developments in China: A neoclassical view. China Economic Review, 22(4), 611-625.

Ge, S., & Yang, D. T. (2014) Changes in China’s wage structure. Journal of the European Economic Association, 12(2), 300-336.

Giedeman, D., & Compton, R. (2009) A note on finance, inflation, and economic growth. Economics Bulletin, 29(2), 749-759.

Guariglia, Alessandra, Xiaoxuan, Liu, and Lina, Song (2011) Internal finance and growth: Microeconometric evidence on Chinese firms. Journal of Development Economics, 96, 79-94.

Harrison, A., & McMillan, M. (2003) Does direct foreign investment affect domestic firm credit constraints? Journal of International Economics, 61(1), 73−100.

Harrison, A., Love, & McMillan, M. (2004) Global capital flows and financing constraints. Journal of Development Economics, 75, 269−301.

Hubbard, R. G. (1998) Capital market imperfections and investment. Journal of Economic Literature, 36(1), 193−225.

Knight, J. and Ding, S. (2010) Why does China Invest So Much? Asian Economic Papers, 9, 87-117. Konings, J., Rizov, M., & Vandenbussche, H. (2003) Investment constraints in transition countries. Economic Letters, 78(2), 253−258.

Lee, L. (2012) Decomposing wage differentials between migrant workers and urban workers in urban China's labor markets. China Economic Review, 23(2), 461-470.

Levine, R., Loayza, N., & Beck, T. (2000) Financial intermediation and growth: Causality and causes. Journal of monetary Economics, 46(1), 31-77.

Lin Zhifan and Qiuyun Zhao (2015) Can Financial Repression Suppress Labor Share in Income?Empirical Evidence from World Bank 2012 China Enterprise Survey Data. China Economic Studies, 6, 49-59.

Lizal, L., & Svejnar, J. (2002) Investment, credit rationing and the soft budget constraint: Evidence from Czech panel data. The Review of Economics and Statistics, 84 (2), 353−370.

Love, I. (2003) Financial development and financing constraints: International evidence from the structural investment model. Review of Financial Studies, 16, 765−791.

Islam, Nazrul, Erbiao, Dai, and Hiroshi, Sakamoto (2006) Role of TFP in China’s Growth. Asian Economic Journal, 20, 127-159.

Matsa, D. A. (2010) Capital structure as a strategic variable: evidence from collective bargaining. Journal of Finance 65, 1197–1232.

Michaels, R., Beau Page, T., & Whited, T. M. (2019) Labor and capital dynamics under financing frictions. Review of Finance, 23(2), 279-323.

Michelacci, C., & Quadrini, V. (2005) Borrowing from employees: Wage dynamics with financial constraints. Journal of the European Economic Association, 3(2-3), 360-369.

Michelacci, Claudio, and Vincenzo Quadrini. (2009) Financial markets and wages. The Review of Economic Studies 76(2), 795-827.

Nickell, S. (1981) Biases in dynamic models with fixed effects. Econometrica, 1417-1426.

Pagano, M. and Pica, G. (2012) Finance and Employment. Economic Policy 27(69): 5-55.

Poncet, Sandra, Walter, Steingressc, and Hylke, Vandenbussche (2010) Financial constraints in China: Firm-level evidence. China Economic Review, 21, 411-422.

Roodman, David (2009) A note on the theme of too many instruments. Oxford Bulletin of Economics and Statistics 71 (1), 135–158.

Shao Min, Qun Bao and Ninghua Ye (2013) Credit Constraints and Employee Income: Empirical Evidence for Firms in China. China Economic Quarterly, 12(3), 895-912.

Sharpe, S. A. (1994) Financial market imperfections, firm leverage, and the cyclicality of employment, American Economic Review 84, 1060–1074.

Stein, J. (2003) Agency, Information and Corporate Investment. In George Constantinides, Milt Harris, & Rene Stulz (Eds.), Handbook of the Economics of Finance. Amsterdam: North Holland.

Whited, T. (1992) Debt, liquidity constraints, and corporate investment: Evidence from panel data. Journal of Finance, 47(4), 1425−1460.

Windmeijer, Frank (2005) A finite sample correction for the variance of linear efficient two-step GMM estimators. Journal of Econometrics 126, 25–51.

Yang, D. T., Chen, V. W., & Monarch, R. (2010) Rising wages: Has China lost its global labor advantage? Pacific Economic Review, 15(4), 482-504.

Zhao, Yaouhui (2002) Earnings Differentials between State and Non‐State Enterprises in Urban China, Pacific Economic Review, 7 181-197.

Zhang, J., Wang, L., Wong, S. (2012) Financial development and economic growth: Recent evidence from China. Journal of Comparative Economics 40, 393-412.

Zheng, Jinghai, Arne, Bigsten, and Angang, Hu (2009) “Can China’s Growth be Sustained? A Productivity Perspective”, World Development, 37, 874–888.

Zheng, Jinghai, and Angang, Hu (2006) An empirical analysis of provincial productivity in China (1979–2001). Journal of Chinese Economic and Business Studies, 4, 221–239.

Zhu, R. (2016) Wage differentials between urban residents and rural migrants in urban China during 2002–2007: A distributional analysis. China Economic Review, 37, 2-14.