Consumption Response to Minimum Wages: Evidence from Chinese Households

Abstract

This article evaluates the impact of the Chinese minimum-wage policy on consumption of low-wage households for the period 2002–2009. Using a representative panel of urban households, we find that the consumption response to minimum-wage income hikes increases in the share of minimum-wage income in total household income. In particular, poorer households fully consume their additional income, while meaningful negative employment effects are absent. The large marginal propensity to consume is driven by households with at least one child, while poor, childless households save two-thirds of a minimum-wage hike. The expenditure increase is concentrated in health care and education with potentially long-lasting benefits to household welfare.