Social insurance contributions and labor income share—Evidence from China's Social Insurance Law

Abstract

This paper analyzes the impact of social insurance contributions on the labor income share and its mechanisms, based on the exogenous policy shock of the implementation of the China's Social Insurance Law, by constructing a theoretical model and using the DID method. The results show that the increase in the social insurance contribution resulting from the implementation of the Law significantly increased the capital-labor ratio of firms, which in turn increased the labor income share. After the decomposition of the labor income share, it is found that the increase in the labor income share due to the increase in the level of social insurance contributions is attributable to the increase in per capita labor compensation exceeding the increase in labor productivity. After the implementation of the Law, the labor income share increased more for firms that were subject to stricter tax control, stronger labor protection, more difficult cost shifting, smaller elasticity of factor substitution, and weaker degree of financing constraints. This study better explains the phenomenon of China's labor income share rebound, provides empirical evidence from developing countries to increase the labor income share, and emphasizes the importance of protecting workers' social insurance rights and interests and regulating firms' social insurance contribution behavior to increase the labor income share, which helps to deepen the understanding of the role of social insurance system reform in regulating income distribution.