Who bears the burden of employer compliance with social security contribution? Evidence from Chinese firm level data Ingrid Nielsen, Russell Smyth 2011级财政学 高洁 顾萌

1. Introduction 2. Theoretical framework 3. Overview of existing studies 4. Employer compliance with social insurance in Shanghai 5. Data 6. Empirical specification 7. Empirical results 8. Conclusion

Abstract Dataset: Shanghai 2002 and 2003 Target: examine the extent to which employers shift the burden of compliance with social security obligations back to employees in form of lower wages. Means: two-stage least squares fixed effects panel model

1. Introduction Security system reform: non-state sector, costs are equivalent to 40-50% of salary, higher than other Asian countries. Whether employer compliance with mandated benefits affects whether employers shift the incidence back on to employees in transitional economies such as China. Dataset: two successive audits form 2002 and 2003 conducted by the Bureau of Labor and Social Security. Single city advantage

2. Theoretical framework Summers(1989) P S S` w w` D D` Q

2. Theoretical framework Summers(1989) P S S` W W` D D` Q Q` Q

2. Theoretical framework w: wage rate prior to social insurance contributions tf : contribution rate borne by employers te : contribution rate borne by employees q: the extent to which employees value the employer’s contribution ,relative to cash income(0<q<1) a: the extent to which employees discount their contributions relative to cash income(0<a<1) Ld = fd ( w ( 1 + tf ) ) Ls = fs ( w ( 1 - ate ) + qwtf)

2. Theoretical framework ed and es :labor elasticity of demand and supply There are three conditions under which full shifting will occur ( (dw/w)dtf = -1). q=1 and a=0 es =0 ed is infinite note : In Shanghai ,it is unlikely that employees would expect q to be close to 1 (dw/w)dtf=［esq-ed］/［ed-es(1-ate)］

3. Overview of existing studies United states Other countries dataset results 1 1980s,Several high cost industries 85% 2 Females of child bearing age, mandated maternity benefits 100% 3 Experience-rated tax for unemployment insurance in Washington. Individual level earnings Firms with a high risk of unemployment passed costs 4 Rising health premiums on wages 10% increase 2.3% reduced dataset results 1 Swedish time series for 1950-1979 A half of the cost 2 1980s Chile manufacturing census data full 3 A panel of European countries More than half 4 Japanese firms 70-97 Not at all 5 health insurance from 1995-2001 Majority 6 Taiwan’s labor standards law Females wage fell

4. Employer compliance with social insurance in Shanghai Pension insurance Medical insurance Industrial injury insurance Maternity insurance Unemployment insurance urban Social insurance scheme rural town

4. Employer compliance with social insurance in Shanghai Pension insurance 22% Medical insurance 12% Industrial injury insurance 0.5% Maternity insurance 0.5% Unemployment insurance 2% Mandated Contribution 37% Employer compliance Voluntary contributions Commercial pension insurance

4. Employer compliance with social insurance in Shanghai Since 2001, independent auditor engaged But Compliance rates are low

4. Employer compliance with social insurance in Shanghai Reason for low compliance rate The prospect of an employer getting caught in the annual audit if it is not complying with the regulations is quite low The lack of an effective enforcement mechanism if employers are audited and found to have underpaid

5. Data In 2002 and 2003 the BOLSS in Shanghai engaged independent accountants to audit 5400 and 5600 firms respectively to ascertain whether they were making their prescribed social insurance payment. A representative sample of enterprises in terms of industry and ownership type and number of employees

5. Data 5212 5480

5. Data

6. Empirical specification COMPLIANCE: continuous variable paid exactly the mandated 37% of payroll 0 under-compliance eg. 32% —— -5 over-compliance eg. 42% —— +5 rescaled expected sign on the coefficient is negative

6. Empirical specification SIZE: The number of employees in each firm ( in hundreds) expected sign on the coefficient is positive SECTOR: dummy variable Manufacturing 0 Others 1 expected sign on the coefficient is positive

6. Empirical specification

expected sign on the coefficient is negative 6. Empirical specification OWNERSHIP: dummy variable FIE 0 others 1 expected sign on the coefficient is negative

7. Empirical results Instrumental variable Requirement : correlated with compliance , unrelated with wage ceteris paribus Reaudit: for the 2002 sample is a dummy variable equal to 1 if the firm had been audited in 2001and otherwise 0 Reason: 1,correalted with compliance. 2,only correlated with wage through its impact on compliance.

7. Empirical results Table 3 The result of the cross-sectional ordinary least squares ( OLS ) and two-stage least squares ( TSLS ) estimates for 2002

significant and negative 9.1% of the incidence was shifted back on to employees in the form of lower wage.

7. Empirical results Table 4 The COMPLIANCE variable is disaggregated for employers who are under- and over-compliant

significant and positive 1% increase in the percentage of under-compliance, 0.568% increase in average wages. insignificant

The coefficient on compliance in the TSLS estimate is statistically significant with the expected negative sigh.

Reason: 1,reaudit is a much better instrument for under- compliance than over-compliance. 2,improved enforcement between 2002 and 2003.

7. Empirical results Table 7 The fixed effects panel regression estimates for the sub-sample of 796 firms that were audited in both 2002 and 2003 Over the two years 18.9% of the compliance cost was shift back to employees in the form of lower wages.

Employees in the sample firms in Shanghai value the benefit of the employers’ social insurance contribution by less than the cost to the employer The extent to which firms in our study shift the cost of compliance back is smaller than previous studies

explanation Employer contribution The direct benefit to employees of a 1% reduction in the percentage of under-compliance is relatively small 3% deposited in an individual account Employer contribution The rest in the social pooling fund

8. conclusion To what extent do employers shift the burden of employer compliance back on to employees in the form of lower wages 9.1% 2002 33.8% 2003 The level employer compliance with social security commitment increased

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