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Minimum Wages, Import Status, and Firms' Innovation: Theory and Evidence from China

Chu, Angus C. and Fan, Haichao and Furukawa, Yuichi and Kou, Zonglai and Liu, Xueyue (2019): Minimum Wages, Import Status, and Firms' Innovation: Theory and Evidence from China.

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Abstract

This study explores the heterogeneous effects of minimum wage on innovation of different types of firms. We develop an open-economy R&D-based growth model and obtain the following result: raising the minimum wage reduces innovation of firms that use domestic inputs but increases innovation of firms that import foreign inputs. Intuitively, when the minimum wage increases, importing firms substitute labor with imported inputs, which have technology spillovers and enhance their innovation. We test this result using city-level data on minimum wages and firm-level patent data in China. Finally, we find that in accordance with our theory, raising the minimum wage is associated with more innovation by importing firms and less by non-importing firms. This result survives a battery of robustness checks.

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