【原创】Estimating the Relative Level of Minimum Wage in China
Ye Linxiang (叶林祥)1, LiShi (李实)2 and Yang Can(杨灿)3*
1 Schoolof Economics, Nanjing University of Finance and Economics, Nanjing, China
2,3Schoolof Economics and Business Administration, Beijing NormalUniversity, Beijing,China
Abstract: It is generally believed in existing literature that China’s minimumwage is too low and must be raised substantially. Such a view is highlymisleading given the inconsistent statistical standards for minimum and averagewages. In order to ensure comparability, this paper has adjusted thestatistical scope for minimum and average wages respectively. If employees ofurban private and self-employed businesses are included in calculating theaverage wage, the minimum-to-average wage ratio will increase by about 0.06;if the minimum wage standards of various localities include personalcontributions to social insurance and the housing fund, the minimum-to-averagewage ratio will increase by 0.008; if overtime pay is deducted from the averagewage, the minimum-to-average wage ratio will further increase by around 0.06.Inaddition, if the median wage is used in place of the average wage, theminimum-to-average wage ratio will increase by at least 0.08.After these adjustments, China’s minimum-to-average wage ratio for 2013 willincrease from 0.28 to 0.49, which is within the range of between 0.40 and 0.60that is recognized internationally as reasonable. Our analysis suggests that asfar as the immediate interests of workers are concerned, it is more imperativeto unify the statistical approaches for minimum and average wages in China thanto raise the minimum wage standard. In order to achieve the expected effect,simply raising the minimum wage alone is not enough. What is also necessary isto enhance supervision and inspection on compliance by firms with the minimumwage policy, particularly the overtime pay regulations. An alternative is toreplace monthly minimum wage with hourly minimum wage.
Keywords:minimumwage, urban private and self-employed businesses,overtime pay, wage gaps
JELClassificaiton Codes: J81, J38, J88
1. Introduction
The system of minimum wage originated from New Zealand and Australia in1894. Today, it has been adopted by 80% of the countries worldwide. Chinaenacted the Regulations on the MinimumWage of Enterprises in 1993. The LaborLaw of the People’s Republic of China effective as of 1994 furtherclarified the legal status of the minimum wage. Since the enactment of thenewly-revised Regulations on the MinimumWage in 2004, the minimum wagestandards at the local level have been adjusted more significantly andfrequently than ever before. The Chinese government has attached a great dealof importance to the minimum wage policy as a safeguard to the interests of theordinary workers and especially low-income workers.
The minimum wage policy concern the following three issues:(1) science-based and reasonable determination of minimum wage standards; (2)compliance and enforcement; (3) the economic effect of the policy, i.e., theimpact on wage, employment and income gaps. Among them, the determination ofminimum wage standards is the most fundamental. If set too low, they will not achievethe expected effect; if set too high, they will discourage companies fromrecruiting less skilled workers, which is contrary to the policy’s intention(Stigler, 1946; Brown, 1982; Abowd, et al., 1997; Joseph, 2014; Pandelis,2015). In developing countries, a high minimum wage will lead to non-compliance(Saget, 2008; Uma, 2013; Haroon, 2012).
Currently, China’s minimum wage standards are determined and publishedlocally by various provinces, autonomous regions and municipalities. Inexisting literature, the following questions have been considered: ascience-based estimation of China’s minimum wage, the factors influencing itsdetermination and adjustment, and problems existing in its formulation (HanZhaozhou, Wei Zhangjin, 2006; Wei Zhangjin, Han Zhaozhou, Yu Pengyi, 2010; NingGuangjie, 2011; Wu Huipin, 2012; Wang Guohong, Yang Cuiying, 2015). Differentfrom existing literature, this paper focuses on the relative level of theminimum wage across different localities in China. Normally, theminimum-to-average wage ratio is used to measure the relative level of theminimum wage. For the first time, the Regulationson the Minimum Wage of Enterprises released in 1993 recognized that“internationally, the minimum wage is normally equal to 40% to 60% of theaverage wage.” The Regulations on theMinimum Wage newly revised in 2004 once again referred to this standard.
Based on the data of 75 countries, the International Labor Organization(ILO) also discovered that despite great differences in the minimum-to-averagewage ratio across countries, this ratio is around 40% for most countries (ILO,2008). Thus, the above-mentioned range of ratios has been commonly accepted asa reasonable level of the minimum wage. Nevertheless, it is commonly consideredin existing literature that China’s minimum wage standards are set too low. Inits seventh issue of 2010, China LaborJournal published an article titled “ExpertViews on the Minimum Wage System.” In this article, experts including YaoXianguo, Wang Dihai, Yi Dinghong and Li Kungang unanimously believed thatChina’s minimum wage was generally low and could support no more thansubsistence, leaving the expenses of children’s education uncovered. Somestudies even concluded that without other sources of income, the minimum wagewas hardly enough for even basic subsistence in cities (Wang Xueli, 2012; HuangYan and Yang Fang, 2011).
The above views are supported by empirical evidence. The following twoconclusions have been reached in empirical literature. First, the relativelevel of the minimum wage has been declining since China’s adoption of thepolicy in 1994. Du Yang and Wang Meiyan (2008) noted that in 1995, the ratio ofminimum to average wages was 0.44, which dropped to 0.28 in 2006. Based on thedata of 27 provinces, Shi Juan (2009) discovered that the ratio between minimumand average wages fell from 0.41 in 1996 to 0.28 in 2007. Second, theminimum-to-average wage ratio in China is low. As discovered by Han Zhaozhou,Wei Zhangjin and Gao Pei (2000), in 2005 the average ratio between minimum andaverage wages in 35 large and medium-sized cities in China was 0.28. Based oninterprovincial cross-section data of 2005, Luo Xiaolan (2007) discovered thatthe average ratio was 0.22. Using the data of 36 large and medium-sized citiesin 2008, Tian Songqing (2009) estimated the average ratio to be 0.31. Ma Xiaobo(2010) and Han Zhaozhou and Wei Zhangjin (2011) arrived at the results of 0.31and 0.27 respectively based on the data of 35 large and medium-sized cities.Jia Peng and Zhang Shiwei (2013) noted that China’s minimum wage standards werelow in recent years, representing only around 20% of the average wage.
Under the general perception that the minimum wage is too low, scholarshave called for the minimum wage standards to be raised moderately orsubstantially. This view is held particularly strongly among policy advisors(Sun Shuqing, 2006; Cai Zhibin, 2011; Xiao Jiangbo, 2009; Dong Baohua, 2010; OuJianxiang, Liu Yuxun, 2014). In fact, government at all levels already made ita priority to substantially raise the minimum wage standards in China. TheAll-China Federation of Trade Unions (ACFTU) suggested raising the minimum wagestandards to the level of 40% to 60% of the local average wage (Dong Baohua,2010). It is clearly stipulated in the Outlineof the 12th Five-Year Plan (FYP) for National Economic and SocialDevelopment enacted in 2011 and the NationalHuman Rights Action Plan of China releasedby the State Council in 2012 that annual growth of the minimum wage in the 12thFYP should be no less than 13%, so that the minimum-to-average wage ratioshould ultimately reach 40%.
We believe it to be very misleading to simply use the minimum-to-averagewage ratio and compare it with the general standard of 40% to 60%. Minimum andaverage wages are not comparable with each other unless the same statisticalapproach is followed. What are the components that make up the average wage?What are the components that make up the minimum wage? These questions deserveserious deliberation. As for the average wage, there is actually no suchconcept in a strict sense in China. In existing literature, various references tothe average salary actually all derive from the average salary for “urban employees of non-private entities”(which include state-owned enterprises, urban collective enterprises,public-private partnerships, public shareholding companies, foreign-fundedfirms and firms with investments from Hong Kong, Macau and Taiwan) in the China Statistical Yearbook, excludingemployees of urban private and self-employed businesses.
It is stipulated in the Regulationson the Minimum Wage of Enterprises released in 1993 that “whether townshipenterprises are required to follow the minimum wage standards shall bedetermined by the people’s government of the province, autonomous region ormunicipality.” Yet the Regulations on theMinimum Wage enacted in 2003 expanded the scope of application for theminimum wage standards. As stipulated in Article 2, “these Regulations areapplicable to workers who have entered into labor relations with enterprises,private non-profit entities and self-employed businesses operating within theterritories of the People’s Republic of China.” In this manner, employees ofurban private and self-employed businesses have been included into the scope ofapplication for the minimum wage standards. As a matter of fact, they representthe majority of low-wage workers who particularly need protection.
According to our data, the average wage of employees of urban privateand self-employed businesses is normally around 60% of that of employees ofurban non-private entities. By Using the latter to measure theaverage salary of the total workforce,, excluding urban private andself-employed businesses, the above-mentioned literature has seriouslyoverestimated the average salary of the overall workforce and thusunderestimated the minimum-to-average wage ratio. According to the Regulations on the Minimum Wage, thesalary paid by an employer to its employees cannot be below the local minimumwage after excluding the following: (1) additional pay for overtime; (2)allowance for special working conditions like nightshift, high temperature, lowtemperature, underground and hazardous working conditions; and (3) statutorylabor benefits. Thus, the average wage as being used in comparisonwith the minimum wage could not include overtime pay.
According to the explanations in Part 4 Employment and Wage of China Statistical Yearbook 2014, “theaverage wage refers to the amount of wage for each employee on average during aparticular period of time” and “total remuneration includes hourly pay,piecework wage, bonus, allowance and subsidies, overtime pay, as well assalaries paid under special circumstances.” In this sense, the average wage ofemployees of urban non-private entities includes overtime pay and if used asthe average wage of the total workforce, will overestimate the average wage andunderestimate the minimum-to-average wage ratio, as discussed before. It iswell known that wage gaps are staggering in China, with the average wage farabove the median wage. In this context, using the minimum-to-average wage ratiorather than the minimum-to-median wage ratio will also underestimate therelative level of the minimum wage.
So far, we have only found three papers that considered the relativelevel of the minimum wage to be not low. Du Yang and Wang Meiyan (2008)believed that the minimum wage is largely designed to maintain a minimum livingstandard with little change over time. By contrast, the average wage isdetermined by the labor market. Wage increases robustly in times of a boomingeconomy and job market. Therefore, it is reasonable for the ratio betweenminimum and average wages to drop from 0.44 in 1994 to 0.28 in 2006. HuangLezhen (2006), Du Yang and Wang Meiyan (2008) also noted that using the ratiobetween minimum and average wages underestimates the relative level of theminimum wage. The reason is that the average wage is based on the urban laborstatistical reporting system, rather than labor survey. The system of urbanlabor statistical report cannot accurately capture migrant labor and the informalsector, thus overestimating the urban average wage and underestimating the reallevel of the minimum wage.
Dong Baohua (2010) pointed out that the same statistical approach mustbe maintained in comparing the minimum wage with the average wage and correctedthe statistical approaches for minimum and average wages using Shanghai’s datain 2010. The minimum wage in Shanghai does not include personal contributionsto social insurance and the housingprovident fund (hereinafter “housing fund”).Otherwise, if personal contributions were included, the minimum-to-average wageratio would increase from 0.31 to 0.417. If overtime pay,allowance and subsidieswere furtherdeducted from the average wage, the minimum-to-average wage ratio in Shanghaiwould approach the high level of 0.60. Dong Baohua (2010) thus concluded that theminimum wage was not low at least for a considerable number of regions inChina.
Although Huang Lezhen (2006), Du Yang and Wang Meiyan (2008) pointed outthe overestimation of the average wage due to the exclusion of employees ofurban private and self-employed businesses, they did not adjust the statisticalapproach for the average wage, and also did not estimate the relative level ofthe minimum wage in China. Although Dong Baohua (2010) corrected thestatistical approaches for minimum and average wages in Shanghai andrecalculated the ratio between the two, he did not estimate the relative levelof the minimum wage in different regions and years; nor did he consider theunderestimation resulting from employees of urban private and self-employedbusinesses being excluded in the calculation of the average wage. On the basisof the above-mentioned literature, this paper first corrects the statisticalapproach for the average wage using the data of 31 provinces, autonomous regions and municipalities across China between 2004 and 2013 and discoversthat if employees of urban private and self-employed businesses are included inthe calculation of the average wage, the minimum-to-average wage ratio will increaseby about 0.06.
Using the same method of correction, this paper recalculated the relative level ofthe minimum wage estimated by existing literature and arrivedat consistent conclusions. Then, based on data analysis of the China HouseholdIncome Survey Project (CHIP2013), this paper has arrivedat the following discoveries: If personal contributions to social insurance andthe housing fund are included, the minimum-to-average wage ratio will increaseby an additional 0.008 or so; if the average wage does not include overtime pay, theminimum-to-average wage ratio will further increase by around 0.06;and if the median wage is used to replace the average wage, theminimum-to-average wage ratio will increase by at least around 0.08.In 2013, the ratio between China’s minimum wage and average wage stood at 0.28.If employees of urban private and self-employed businesses are included in theaverage wage, the minimum-to-average wage ratio will rise to 0.34; if personalcontributions to social insurance and the housing fund are included in theminimum wage standards, the minimum-to-average wage ratio will rise to 0.35; ifovertime pay is deducted from the average wage, the minimum-to-average wageratio will increase to 0.41; and if the median wage is used to replace theaverage wage, the minimum-to-average wage ratio will increase to 0.49. As thesefigures suggest, the relative level of China’s current minimum wage is not low,reaching the 0.40 to 0.60 level that is internationally recognized as beingreasonable.
This paper is structured as follows: Part 1 offers an introduction; Part2 recounts the changes in minimum and average wages in China between 1994 and2013; Part 3 discusses corrections to the average wage after taking into accountprivate and self-employed businesses to estimate the relative level of China’sminimum wage; Part 4 discusses adjusting the statistical approach for theminimum wage, deducting overtime pay from the average wage and replacing theaverage wage with the median wage to recalculate the average level of theminimum wage; Part 5 offers conclusions and policy recommendations.
2. Changes in the Minimum Wage in China (1994-2013)
China began to implement the minimum wage system in 1994. Figure 1provides changes in the minimum and average wages since 1994. The minimum wageis calculated as follows. First, the highest and lowest grades of minimum wagein each province are averaged to arrive at the average minimum wage of theprovince. If the minimum wage of the province is adjusted for the year, theresult will be further weighted by month. Then, the average values of minimumwages in all provinces are further averaged to arrive at the average minimumwage at the national level. The average wage of employees is taken from theaverage wage of employees of urban non-private entities in China Statistical Yearbook 2014. As shown in Figure 1, the minimumand average wages have both been on the rise since 1994.
Since the enactment of the newly-revised Regulations on the Minimum Wage in 2004,local governments took bolder steps to adjust the minimum wage standards.Annual growth rate of the minimum wage in China averaged 8.7% between 1994 and2004 and 11% between 2004 and 2013. Annual growth rate of the average wage inChina stood at 13.1% between 1994 and 2004 and budged down to 12.3% between2004 and 2013. Despite an increase since 2004, growth in the minimum wagegenerally fell behind growth in the average wage. Figure 2 provides changes inthe minimum-to-average wage ratio. Between 1994 and 2009, theminimum-to-average wage ratio continuously declined, reaching its bottom ofabout 0.24 in 2009 before rising thereafter.
The rising minimum-to-average wage ratio since 2009 can be attributed tothe following reasons. First, in order to combat the aftermath of the globalfinancial crisis, China shelved its plan to raise the minimum wage in 2009 andcontinued to follow the standards of 2008 and before. With the upturns in theeconomy, pent-up demand for raising the minimum wage standards was suddenlyunleashed nationwide. The second reason is the growing importance attached bythe central government to the minimum wage system.
Both the Outline of the 12thFYP enacted in 2011 and the NationalHuman Rights Action Plan of China releasedby the State Council in 2012 sent a clear message that annual growth of theminimum wage in the 12th FYP should be no less than 13%, so that theminimum-to-average wage ratio should ultimately reach 40%. Despite itscontinuous rise, the minimum-to-average wage ratio of employees of urbannon-private entities faltered at 0.28 in 2013. The implication is that if theminimum-to-average wage ratio of employees of urban non-private entities isused to measure the real level of the minimum wage, China’s minimum wage isindeed very low and itsrelative ratio is far behind the desired 0.40 level.
3. The Relative Level of China’s Minimum Wage:Taking into Account Employees of Urban Private and Self-Employed Businesses
A great deal of literature has found the minimum-to-average wage ratioto be very low, ranging between 0.22 and 0.33, as shown in Table 1.As discussed in the previous section, however, this ratio is seriouslyunderestimated. Specifically, the average wage of employees adopted in theliterature is not accurate, because private and self-employed businesses areexcluded.
In order to accurately assess the relative level of the minimum wage,the average wage of employees in the strict sense must be obtained. It must bethe average wage of all urban employees, including not only employees of urbannon-private entities as covered in previous literature but employees of urbanprivate and self-employed businesses who are left out in previous literature aswell. By making a, b and c denote the proportions of employees of urban entities, employeesof private businesses and employees of self-employed businesses, and UW, PWand IW respectively denote theaverage wage of the three groups, the average wage of total urban employees (AW)can be expressed as follows:
By accessing national and provincial statistical yearbooks, we mayarrive at the average wage of employees of urban non-private entities (UW),together with the proportions of employees of urban non-private entities,private businesses and self-employed businesses, i.e., a, b and c. If the average wage of employees ofurban private businesses and self-employed businesses can be obtained, theaverage wage of all urban employees can be obtained.
Since the National Bureau of Statistics (NBS) did not launch the systemof statistical survey for the wage of private businesses until 2009, theaverage wage of private businesses before 2008 and the average wage ofself-employed businesses for all years are not available. Nevertheless, givenhigh competitiveness, strong labor mobility and a low threshold for migrantworkers in urban private and self-employed businesses, the average wage ofmigrant workers is rather close to the average wage of employees in thesesectors. Hence, the average wage of migrant workers can be substituted for theaverage wage of employees of urban private and self-employed businesses.
Table 2 lists the average wages of rural migrant workers and employeesof urban non-private entities between 2003 and 2012, together with their ratio.The average wage of rural migrant workers is indeed far below that of employeesof urban non-private entities, with the ratiobetween 0.5 and 0.59.Table 3 presents the average wage of employees of urban private businesses andemployees of urban non-private entities between 2009 and 2013. Table 3 showsthat the average wage of employees of urban private businesses also is farbelow that of employees of urban non-private entities, with the ratio between0.56 and 0.64. Both Tables 2 and 3 suggest that the average wage of migrantworkers and the average wage of employees of urban private businesses areindeed rather close to each other, both of which have the ratio of around 0.6to the average wage of employees of urban non-private entities. These resultsof comparison demonstrate that the wage of migrant workers can be reasonablyreplaced by the average wage of employees of urban private and self-employedbusinesses[1].
Although the average wage of employees of urban private andself-employed businesses is not directly available from the statisticalyearbooks, Table 2 provides the average ratio of the average wage of employeesof urban private and self-employed businesses to the average wage of employeesof urban non-private entities. The latter, which is available, can be used toindirectly estimate the average wage of employees of urban private andself-employed businesses[2]. According to the equation of the average wage of urban totalemployees, the adjusted average wage that includes employees of urban privateand self-employed businesses can be obtained. Using the above method ofcorrection, this paper has re-estimated the relative level of the minimum wagein 31 Chinese provinces, autonomous regions and municipalitiesbetween 2004 and 2013, with results shown in Table 4.
The re-estimated minimum-to-average wage ratio increased to the rangebetween 0.296 and 0.331, up from the range between 0.24 and 0.277,up by around 0.06. Before correction, the relative level of the minimum wage was below 0.30for most provinces and no province exceeded 0.40. After correction,the relative level of the minimum wage for most provinces exceeds 0.30and this figure is well above 0.40 for some provinces.
This paper has also re-estimated the relative level of the minimum wageassessed in existing literature, with similar conclusions as shownin Table 1. The minimum-to-average wage ratio increased from the range between 0.22and 0.33 to the range between 0.28 and 0.39, up 0.06on average. In general, the analysis in this part indicates that if employeesof urban private and self-employed businesses are included in the calculationof the average wage, the minimum-to-average wage ratio will increase by around 0.06.
[1] Here, certain bias exist. Migrant workers are paid less thanemployees of urban private businesses in general. For instance, in 2009 migrant workers earned 53% ofthe average wage of employees of urban non-private entities, and employees ofurban private businesses earned 56% of the average wageoffered by urban non-private entities. The former is 3 percentage points lower than the latter. Hence, if assumingthat the average wage of employees of urban private businesses is equal to thatof migrant workers, the average wage level of the totalworkforce will beunderestimated, thus overestimatingthe relative level of the minimum wage compared to the average wage. Existingliterature assumes that the average wage of employees is the same between urbanprivate and self-employed businesses and urban non-private entities. However,this paper assumes that the average wage of urban private and self-employedbusinesses is equal to that of migrant workers, i.e., accounting for 50% to 59%of the average wage of employees of urban non-private entities, and theminimum-to-average wage ratio willincrease by around 6 percentagepoints. Hence, the bias will not affect thebasic conclusions of this paper.
[2] There are some bias, as this paper assumes that the ratio of average wage ofemployees of urban private and self-employed businesses to the average wage ofurban employees are the same nationwide.