Social insurance payments and labour investment efficiency: A quasi-natural experiment

ABSTRACT

This study exploits the passage of the 2011 Social Insurance (SI) Law in China to investigate how a labour protection regulation affects corporate labour investment efficiency (LIE). We find that labour-intensive firms invest more efficiently in labour after the SI Law. Our findings are robust to alternative measures, selection bias and endogeneity concerns. Overall, our findings show that labour protection regulations have a profound impact on corporate employment decision-making.

KEYWORDS:

• Social insurance premium
• Social Insurance Law
• employee-friendly
• labour investment

Acknowledgement

We acknowledge the helpful comments from the Editor and two anonymous referees. Qing Sophie Wang acknowledges the financial support from Jiangxi Social Science Fund (21GL54D). All errors remain our own.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ The first SI interim regulation was introduced in 1999 by the State Council, which aims to standardize the collection and guarantee the issuance of SI funds. However, the collection of the payments was not fulfilled and the majority of employees enjoyed limited benefit from the old SI system.

² The SI Law requires employers to provide basic pension as well as four types of insurance, including basic medical, work-related injury, unemployment compensation, and maternity for all workers. See “The new PRC social insurance law and expatriate employees” for details. Retrieved from https://www.chinabusinessreview.com/the-new- prc-social-insurance-law-and-expatriate-employees/on 29/03/2022.

³ We thank an anonymous referee for the suggestion.

⁴ Cross-sectional analysis reveals that the positive effect of the SI Law on LIE is more pronounced for firms with better corporate governance, lower information opaqueness, and higher labour skills. For brevity, the results are presented in Appendix C.

⁵ Our results remain robust if we use matching with replacement or a 1:3 matching.

⁶ We thank an anonymous referee for suggesting this method.

⁷ A firm’s industry median level of net hiring is used as a proxy for the optimal level in Cella (2020).

⁸ In Biddle, Hilary, and Verdi (2009), labour investments are regress with only sales growth and the absolute value of the residuals is used as the proxy for deviations from the optimal net hiring.

⁹ Following Cao and Rees (2020) and Wang et al. (2022), non-labour investment is calculated as the sum of capital expenditure, R&D expenditure, advertising expenditure, and acquisition expenditure.