Can social insurance contributions boost labor share?—Evidence from China’s social insurance law

Improving the factor income distribution is a crucial issue in the field of income inequality. Using large-scale data from China's National Tax Survey from 2008 to 2016, this paper examines the impact of the implementation of the Social Insurance Law on firms' labor share and its mechanisms. The results show that the Social Insurance Law significantly reduces firms' labor share. Although it increases the firms' social insurance rate and total amount of social insurance contributions, firms respond by reducing the number of employed labors and net wages to mitigate rising labor costs, as well as adopting alternative technological advancement patterns and capital deepening behavior, leading to a reduction in labor share. The weakening effects of Social Insurance Law primarily exist in non-SOEs, and MSEs, and firms faced with higher financial constraints and located in lower judicial quality areas. Our study suggests that stronger social security collection could account for the decline in labor share worldwide.