Trade and Minimum Wages in General Equilibrium: Theory and Evidence
AbstractThis paper develops a new simple competitive model of supply in a Heckscher-Ohlin setting, with heterogeneous firms and migration. It uses the model to help understand the effect of minimum wages in general equilibrium using Chinese transaction level trade data matched with firm level production data. The model makes a number of intuitive and clean predictions of the effects of a binding minimum wage, for which we provide robust empirical evidence. A binding minimum wage raises prices of all goods, while reducing the output and exports
of the labor intensive good, along with creating unemployment. As price rises but quantity falls, value may rise or fall depending on the elasticity of demand. Higher minimum wages encourage substitution away from low skilled labor and, less obviously, make selection stricter in the labor intensive sector and weaker in the capital intensive sector. The minimum wage also encourages the flow of migrants from the hinterland, creates unemployment, as well as amplifying the effects of the minimum wage itself.