Lewis Turning Point, Rising Wages and Firm Innovation
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| Title | Lewis Turning Point, Rising Wages and Firm Innovation
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| Author | Zhuan Xie and Xiaobo Zhang |
| Organization | National School of Development, Peking University |
| Email | zhuanxie2016@163.com；x.zhang@nsd.pku.edu.cn |
| Key Words | Lewis turning point; rising wages; firm innovation; patent |
| Abstract | There is a large debate as to how factor scarcity shapes firm innovations in the literature. Since the mid-2000s, China has passed the “Lewis turning point” --- rapid wage escalation after surplus labor was exhausted. This paper examines whether labor scarcity induces or inhibits firm innovations based on a matched patent and firm database and using differences-in-difference and instrument variable estimates. It shows that rising wages have induced firms to innovate more to substitute increasingly more expensive labor. In particular, labor-intensive industries have secured more patents than their capital-intensive counterpart. In specific, after China reached the Lewis turning point, the growth rate of approved patents by labor-intensive industries outpaces that of capital-intensive ones by two percentage points. A ten-percent increase in wages (the actual annual growth rate) would widen the gap in number of approved patents between the two types of firms by 0.23-0.41%.Our analyses have some policy implications: rising wages make labor-intensive industries lose some comparative advantage, though meanwhile make them more innovative. The government should let firms that are losing comparative advantage compete to survive rather than subsidize them, which would help to upgrade industries. |
| Serial Number | WP1125 |
| Time | 2016-11-04 |
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