| Summary: | Normally as an economy develops, firm sizes increase. However, as measured by the employment rate, the firm size in China declined from 2004 to 2008. In this paper, we develop a structural dynamic model with heterogeneous workers to study the relative contributions of three factors to declining firm size: rising real wages, implementation of minimum wages, and the introduction of a new national labor contract law. While rising wages make a sizeable contribution, we find that the new labor law plays a dominant role in solving the puzzle. In comparison, the impact of minimum wages is more muted.
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