Is Supplementary Pension Beneficial to Human Capital Investment? Evidence from China

ABSTRACT

We examine the impact of a supplementary pension insurance program (SPIP) and short-term compensation on firm-level human capital investment using a sample of Chinese firms from 2007 to 2018. The findings suggest that both SPIP and short-term compensation have positive effects on human capital investment, and the magnitude of SPIP is stronger than that of short-term compensation. Further analysis suggests that the impact of SPIP on human capital investment in a firm is magnified when the firm has high-quality employees. Our findings are robust after accounting for potential endogeneity concerns. When compared with short-term compensation, SPIPs contribute more to establishing a long-term relationship between a firm and its employees, which stimulates human capital investment.

KEYWORDS:

• Supplementary pension
• short-term compensation
• employee education
• human capital investment

JEL:

• J24
• J31
• J32

Acknowledgments

We acknowledge the helpful comments from two anonymous reviewers and James Saunoris (the Subject Editor). We acknowledge the financial support from Humanities and Social Science Project of the Ministry of Education (18YJC630063, 19XJC630014), and Fundamental Research Funds for the Central Universities (JBK2003007) of China.

Notes

1. For instance, many US firms offer 401(k) plans as SPIPs. These are defined contribution retirement plans. Employee set aside proportion of their salary in the 401 k program with employers agree to match some or all of those contributions. These 401 k plans are very popular due to its tax-deferred feature. Usually, distribution is taken after age 59½, or there is tax punishment. In the 1980s, 401(k) plans was introduced as supplementary to pensions.

2. We produce a table (Table A1) to compare supplementary pensions across the globe. They are in the online supplementary file.

3. We conduct univariate analysis to compare the means of subsamples with and without SPIPs. The results suggest that firms with SPIP have different characteristics from those without. For instance, SPIP firms have higher employee education, pay more in employee training, older, larger, and more likely to be state-owned firm. The details are presented in the online supplementary file.

4. The percent of contributions in all provinces are presented in Table A3 in online supplementary file.

5. Specifically, each firm with a SPIP is matched to two firms without a SPIP with the closest propensity score. We conduct a balance test to verify that the observations in the treatment and control groups are sufficiently indistinguishable in terms of observable characteristics. The matching results are presented in Table A5 in the online supplementary file.

6. The results for the first stage of instrumental variable estimation are presented in Table A8 of the online supplementary file.

Additional information

Funding

This work was supported by the Humanities and Social Science Project of the Ministry of Education of China [18YJC630063,19XJC630014]; Fundamental Research Funds for the Central Universities of China [JBK2003007].