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

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

• DatasetDataset: Shanghai 2002 and 2003

• TargetTarget: examine the extent to which employers shift the burden of compliance with social security obligations back to employees in form of lower wages.

• MeansMeans: 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)

S

D

P

Q

S`

D`

w`

w

2. Theoretical framework

• Summers(1989)

S

D

P

Q

S`

D`

W`

W

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

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

United states Other countries

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

Social insuran

ce scheme

Social insuran

ce scheme

• Pension insurance

• Medical insurance

• Industrial injury insurance

• Maternity insurance

• Unemployment insurance

• Pension insurance

• Medical insurance

• Industrial injury insurance

• Maternity insurance

• Unemployment insurance

towntown

ruralrural

urbanurban

Employer compliance

• Pension insurance 22%

• Medical insurance 12%

• Industrial injury insurance

0.5%

• Maternity insurance 0.5%

• Unemployment insurance

2%

• Pension insurance 22%

• Medical insurance 12%

• Industrial injury insurance

0.5%

• Maternity insurance 0.5%

• Unemployment insurance

2%

MandatedContribution

37%

Voluntarycontributions

• Commercial pension

insurance

• 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

The prospect of an employer getting caught in the annual audit if it is not complying with the regulations is quite low

Reason for low compliance rate

The lack of an effective enforcement mechanism if employers are audited and found to have underpaid

4. Employer compliance with social insurance in Shanghai

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

5212 5480

5. Data

5. Data

6. Empirical specification

COMPLIANCE: continuous variablepaid exactly the mandated 37% of payroll 0under-compliance eg. 32% —— -5over-compliance eg. 42% —— +5

expected sign on the coefficient is negativeexpected sign on the coefficient is negative

rescaled

SIZE:The number of employees in each firm ( in hundreds)

expected sign on the coefficient is positiveexpected sign on the coefficient is positive

SECTOR: dummy variable Manufacturing 0 Others 1

expected sign on the coefficient is positiveexpected sign on the coefficient is positive

6. Empirical specification

6. Empirical specification

OWNERSHIP: dummy variable FIE 0 others 1

expected sign on the coefficient is negativeexpected sign on the coefficient is negative

6. Empirical specification

7. Empirical results

• 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.

Instrumental variable

Table 3Table 3

• The result of the cross-sectional ordinary

least squares ( OLS ) and two-stage least

squares ( TSLS ) estimates for 2002

• The result of the cross-sectional ordinary

least squares ( OLS ) and two-stage least

squares ( TSLS ) estimates for 2002

7. Empirical results

• significant and negative • 9.1% of the incidence was shifted back on to employees

in the form of lower wage.

• significant and negative • 9.1% of the incidence was shifted back on to employees

in the form of lower wage.

Table 4Table 4

• The COMPLIANCE variable is

disaggregated for employers who are

under- and over-compliant

• The COMPLIANCE variable is

disaggregated for employers who are

under- and over-compliant

7. Empirical results

• significant and positive• 1% increase in the percentage

of under-compliance, 0.568% increase in average wages.

• significant and positive• 1% increase in the percentage

of under-compliance, 0.568% increase in average wages.

insignificantinsignificant

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.

Table 7Table 7

• The fixed effects panel regression estimates for the sub-sample of 796 firms that were audited in both 2002 and 2003

• 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.

7. Empirical results

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

The direct benefit to employees of a 1% reduction in the percentage of under-compliance is relatively small

The direct benefit to employees of a 1% reduction in the percentage of under-compliance is relatively small

Employer contribution

3% deposited in an individual account

The rest in the social pooling fund

explanationexplanation

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