Effects of Minimum Wage Hikes on the Formalization of Employment

Despite the intention of minimum wage policy to maintain the living standards of low-income groups in the formal sector, this paper has found that the actual result of this policy produces the "big push" impact on Chinas economy under certain conditions, i.e. it is conducive to achieving the equilibrium of high wage, high consumption and formalization. The result shows that the elasticity of income growth from raising the minimum wage standard is greater for formal sector employees than for informal sector employees and is characterized by a U-shaped pattern in terms of quanti Zes. Thus, minimum wage hikes have widened wage gaps between and within sectors. Rising minimum wage standards greatly stimulate consumption with each 10% increase expected to bring about an additional urban household consumption of about 1.167 billion yuan in the surveyed four provinces. With local minimum wage hikes, the formal sector of wholesale and retail, hotel and catering services expands and the informal sector contracts, while the real estate sector experiences a "reverse formalization" trend. Based on the "big push theory", this paper concludes that against the backdrop of extensive, frequent and substantial minimum wage hikes, demand and sector TFP growth are the major causes of sector heterogeneity.