Labor Costs and Firms’ Internal Spatial Distributions : Evidence from China

Resource allocation within firms is essential for their growth. We investigate how labor costs affect firms’ internal spatial distributions (ISDs) by using Chinese administrative data. We find that the increase in the minimum wage promotes firms to open establishments in regions with lower minimum wage. Our baseline results are robust after conducting various robustness checks. Our study also shows the minimum wage effects are greater for larger firms, sectors where robots are more difficult to apply, private firms, those not in western regions, and for the period after 2008. Our study provides micro-evidence for how firms respond to rising labor costs by changing their ISDs