THE EFFECT OF BANK COMPETITION AND RURAL BANKS ON WAGES: EVIDENCE FROM AGRICULTURAL FIRMS

Raising wages is crucial to reduce income inequality. This study investigates the effect and heterogeneity of bank competition and rural banks on wages using panel data from 101,131 agricultural firms in more than 3,000 counties of China from 1998 to 2015. We find that bank competition contributes to reducing wages and rural bank development raises wages by alleviating financing constraints. Decreased bank competition and rural bank development have a stronger effect in improving the wage of large firms than small and medium-sized enterprises and a stronger effect on the wage of private firms than SOEs and foreign firms. Bank competition has a stronger negative effect on the wage of old firms than that of new firms. The positive effect of rural bank development is stronger for new firms than old firms. Moreover, the expansion of city banks improves wages, whereas foreign banks have no effect on wages. This study provides policy implications of how optimizing rural financial system and business environment can improve wages and promote rural revitalization.