Trade and Minimum Wages in General Equilibrium: Theory and Evidence

71 Pages Posted: 2 Apr 2018 Last revised: 29 Apr 2021

See all articles by Xue Bai

Xue Bai

Brock University - Department of Economics

Arpita Chatterjee

UNSW Business School

Kala Krishna

Pennsylvania State University - Department of Economics; National Bureau of Economic Research (NBER)

Hong Ma

Tsinghua University - School of Economics & Management

Date Written: March 2018

Abstract

Do minimum wages affect economic outcomes beyond low-skill employment? This paper develops a new model with heterogeneous firms under perfect competition in a Heckscher-Ohlin setting to show that a binding minimum wage raises product prices, encourages substitution away from labor, and creates unemployment. It reduces output and exports of the labor intensive good, despite higher prices and, less obviously, selection in the labor (capital) intensive sector becomes stricter (weaker). Exploiting rich regional variation in minimum wages across Chinese prefectures and using Chinese Customs data matched with firm level production data, we find robust evidence in support of causal effects of minimum wage consistent with our theoretical predictions.

Suggested Citation

Bai, Xue and Chatterjee, Arpita and Krishna, Kala and Ma, Hong, Trade and Minimum Wages in General Equilibrium: Theory and Evidence (March 2018). NBER Working Paper No. w24456, Available at SSRN: https://ssrn.com/abstract=3154240

Xue Bai (Contact Author)

Brock University - Department of Economics

500 Glenridge Avenue
St. Catherines, Ontario L2S 3A1
Canada

Arpita Chatterjee

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Kala Krishna

Pennsylvania State University - Department of Economics ( email )

523 Kern Graduate Building
University Park, PA 16802-3306
United States
814-865-1106 (Phone)
814-863-4775 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hong Ma

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

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