Firms’ labor market and evasion responses to the minimum social security contributions

Abstract

This study examines the effects of raising social security contributions on firms’ wages and employment and reveals the importance of combining labor market effects with enforcement stringency for comprehensive evaluations. We focus particularly on the minimum contribution requirement in China’s social security program. By exploiting its city-by-year variations, we find robust evidence that an increase in the minimum contribution base would reduce both firms’ average wage and employment, and induce more evasion. When non-compliance is more likely, firms tend to evade more and reduce less in wages and employment. Heterogeneous analysis shows that firms with different characteristics tend to employ different instruments to reduce the contribution burden. Our estimates also indicate that firms exhibit a greater sensitivity to the minimum contribution base compared to the employers’ contribution rate. These results underscore the importance of the minimum base in influencing firms’ labor market responses and highlight the interactions between evasion and labor market responses in addressing the increase in social security contributions.