Wage increase and innovation in manufacturing industries: Evidence from China

Abstract

This paper explores the relationship between wage increase and innovation and investigates the underlying mechanisms through which wage increase affects innovation. Empirical results, based on the data from 37 two-digit manufacturing industries in China from 2002 to 2019, show that the increases in wages do contribute to innovation in general but their contributions vary across industries and over time. Specifically, the effects of the increasing wages on innovation were insignificant before 2008 but became positively significant after 2008. Moreover, labor productivity acts as a mediating channel between wage increase and innovation while the labor substitution mechanism does not work. The findings in this study offer a new understanding of the effects of the increasing wages on innovation in developing countries.

Keywords:

• wage increase
• innovation
• manufacturing industry
• Labor Contract Law
• China

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 In 1984, China officially recognized the Minimum Wage-Fixing Machinery Convention established by the International Labor Organization in 1928, and in 1993 the first minimum wage legislation-Regulation on Enterprise Minimum Wages-was issued (Jia 2014; Long and Yang 2016).

2 Please see Mayneris, Poncet, and Zhang (2018) for a detailed introduction for the 2004 Reform.

Additional information

Funding

We thank participants of The Second International Workshop on Innovation and Industrial Economics (2018), Professor Ya Feng and Professor Na Wang, for their helpful comments, and the National Social Science Foundation of China (No.13CJY061; No.11cjy004) for the financial support. We are also grateful to Professor Saroja Selvanathan and reviewers of JAPE for their insightful suggestions, which greatly help us polish our paper.

Notes on contributors

Junwei Shi

Prof. Junwei Shi is a professor of innovation and industrial economy at Zhongnan University of Economics and Law. His research interests include innovation strategy, industrial upgrading, and national industrial competitiveness. Prof. Shi published five books on industrial innovation and competitive advantage, and more than 40 articles in referred journals, both in Chinese and English, and more than 10 articles were reprinted by Xinhua Digest and other literature medias. He is the director of The ZUEL Center for Industrial Economics Research (CIER).

Hongyan Liu

Dr. Hongyan Liu is an associate professor at Wuhan Business University. Her research interests lie in labor environment and industrialization in China and industrial innovative capability. Dr. Liu published more 10 articles in referred journals.