Who bears the burden of employer compliance with social security contribution?

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. Dataset: two successive audits form 2002 and 2003 conducted by the Bureau of Labor and Social Security. Single city advantage Whether employer compliance with mandated benefits affects whether employers shift the incidence back on to employees in transitional economies such as China.

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

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

7. 2. Theoretical framework Ld = fd ( w ( 1 + tf ) ) Ls = fs ( w ( 1 - ate) + qwtf) 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)

8. 2. Theoretical framework (dw/w)dtf=［esq-ed］/［ed-es(1-ate)］ 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

9. 3. Overview of existing studies United states Other countries

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 0.5% • 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 0 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 ispositive SECTOR: dummy variable Manufacturing 0 Others 1 expected sign on the coefficient ispositive

20. 6. Empirical specification

21. 6. Empirical specification OWNERSHIP: dummy variable FIE 0 others 1 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 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 !