Can China Meet its Minimum Wage Goal?

The State Council’s newly released income inequality reform plan set forth an ambitious sounding goal that by 2015 the minimum wage should be 40 percent of the average wage throughout most of the country.

Like many parts of the plan, this is actually a recycled policy from the 12th Five Year Plan that was released in 2011. Given that this goal has been around for a couple years now, is China likely to meet its deadline?

The most recent data we have for average and minimum wages by Chinese province is 2011. The chart below shows the minimum wage as a percentage of the average wage for various provinces.

There is a significant degree of variation between provinces. The minimum wage in wealthier provinces tends to be lower relative to the average wage than in poorer provinces. This is particularly true for the centrally administered cities Beijing, Tianjin, and Shanghai. Tibet stands out as a bit of an outlier as a poor province with a low minimum wage compared to its average wage. It is important to note that many provinces have several grades of minimum wage. The figures above represent the highest grade (第一档).

In 2011, the minimum wage was 30 percent of the average wage for country as a whole.  At first glance, it seems that reaching the target level of 40 percent may not be a particularly challenging.

Meeting the target becomes more difficult when you factor in the growth of the average wage in China, which has increased 15 percent annually over the past five years. Even though the minimum wage has been growing rapidly it has stayed relatively stable as a share of the average wage. This is because the average wage and the minimum wage have been growing at similar rates.

For China to meet its target of raising the minimum wage to 40 percent of the average wage, the minimum wage will need to grow several percentage points faster than average wage. If the trends of the recent past persist, the minimum wage will need to increase by more than 20 percent on an annual basis for the next several years.

Local governments will need to become more generous in increasing the minimum wage if China is to meet the 2015 target set forth in its income inequality plan.