Social security fee reduction, industrial robots, and labor income share

Abstract

This study explores whether the policy of reducing labor payments can have opposite effects to those expected. Specifically, it investigates whether reducing the social insurance contribution rate can increase labor employment and enhance overall labor income. This study focuses on a direct social security fee reduction event in China. This event targets labor-intensive enterprises and encourages adopting industrial robots. By leveraging this quasi-natural experiment, we construct a mathematical model. Further, using a triple-difference strategy, we examine the impact of social security fee reduction on firm factor structures and income distribution. This study observes that a social security fee reduction decreases the labor income share of enterprises. However, this only applies to non-small and medium-sized enterprises (non-SMEs) and is not observed in SMEs. Consequently, because of the social security fee reduction, automation is the primary cause of the decline in the labor income share. The reduction in social security fees enables companies to use the saved funds for further automation, causing labor productivity to exceed labor costs and ultimately reducing the labor income share. The findings suggest that industrial specialization is one of the reasons for labor income share decline in transitioning economies.