Rural-urban Migration and Minimum Wage – A Case Study in China

In spite of their positive influence on living standards and social inequality, it is commonly agreed that minimum wage laws reduce output because they produce unemployment. This paper suggests that minimum wage policy may be beneficial for a transitional economy in which labor is migrating from rural region to urban region and positive migrating costs occur. With a positive migrating cost, a binding minimum wage can cause relatively low productivity urban workers to be replaced by more productive rural migrants, and therefore increase aggregate output. Moreover, minimum wage policy can be used to affect migration flows and social inequality. The simulation results suggest that minimum wage policy may benefit the whole economy if it is only binding for urban workers but not for migrant workers in the urban industrial sector. Otherwise output is negatively affected. To achieve the second best outcome, governments should fully compensate the migrating costs for the marginal migrant workers who migrate from the rural industrial sector to the urban subsistence sector and a binding minimum wage should be imposed on the urban workers but not the migrant workers in the urban industrial sector.