1. 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

2. 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

3. 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

4. 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

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

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

7. 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)

8. 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)］

9. 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
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
Majority 6
Taiwan’s labor standards law
Females wage fell

10. 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

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

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

13. 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

14. 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

15. 5. Data
5212
5480

16. 5. Data

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

19. 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
expected sign on the coefficient is positive

20. 6. Empirical specification

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

22. 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.

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

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

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

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

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

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

30. 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.

31. 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

32. 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

33. 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

34. Thank You !