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| Social Security Contribution Reduction and Firm Labor Structure: An Analysis Based on the Choice between Formal Employment and Labor Outsourcing |
| HAN Yadong, YANG Limei, XING Chunbing, CHONG Cong
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School of Accounting, Zhejiang Gongshang University;
School of Business, Beijing Technology and Business University;
School of Agricultural Economics and Rural Development, Renmin University of China;
Research Center for Rural Economy, Ministry of Agriculture and Rural Affairs |
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Abstract Tax and fee reductions are crucial measures in China's current phase to alleviate the burden on various business entities and stimulate market vitality. The “Comprehensive Plan for Reducing Social Insurance Premium Rates” implemented in 2019 represents the most significant social security contribution reduction policy since the establishment of China's social security system. As social security contributions constitute a major component of firm labor costs, this policy directly impacts corporate hiring behavior. While extensive research exists globally on how social security contributions affect firm employment, most existing studies focus solely on formal employment, neglecting informal employment forms such as labor outsourcing. This oversight may lead to biased conclusions. In practice, labor outsourcing offers a relative cost advantage due to its simpler cost structure; client firms are not required to bear social security costs for outsourced workers, allowing them to effectively transfer social security contribution burdens while meeting labor demands. Consequently, informal employment methods like labor outsourcing are becoming increasingly important choices for firms. Between 2012 and 2023, the proportion of labor outsourcing among Chinese listed companies surged from 6.79% to 34.73%. However, whether firms adjust their choices between formal and informal employment in response to changes in social security contribution pressure remains unexplored.
Addressing this gap, this paper exploits the implementation of the “Comprehensive Plan for Reducing Social Insurance Premium Rates” as an exogenous shock, and employs a Difference-in-Differences (DID) model, distinguishing between treatment and control groups based on the pre-policy (2018) social security contribution pressure of sample firms, to examine the impact of the reduction on firms' choice between formal and informal employment. We find that, compared to firms facing lower social security contribution pressure, the implementation of the reduction policy significantly decreased the use of labor outsourcing by firms under higher pressure. This suggests that labor outsourcing serves as a mechanism for firms to transfer social security contribution burdens. Mechanism tests reveal that the contribution reduction influences firm hiring choices through two primary pathways: First, “cost-driven effect”: the policy significantly lowers the social security cost burden of formal employment, narrowing the explicit cost gap comparing with labor outsourcing, thereby alleviating short-term labor cost constraints and prompting firms to reduce outsourcing. Second,“benefit-driven pathway”: the policy dividend strengthens firms' long-term development orientation, encouraging them to allocate more resources to formal employees possessing specific human capital, aligning with long-term strategic needs such as quality control. Furthermore, we find that the contribution reduction policy promotes firm investment in formal employees regarding hiring, compensation incentives, knowledge and skills, and capability development, contributing to enhanced Total Factor Productivity (TFP). Third, heterogeneity analysis indicates that the impact of the contribution reduction on employment choices is more pronounced for firms with higher labor intensity, facing a greater burden from the contribution base, or operating under stronger external social security contribution enforcement.
The innovations and contributions of this paper are as follows: First, by analyzing the dynamic adjustment process of firm employment modes, it systematically examines the labor economics effects of the social security contribution reduction policy, addressing the limitations of existing research. Utilizing China's policy implementation as an exogenous shock and incorporating labor outsourcing into the analytical framework, this paper not only demonstrates that outsourcing is a key method for transferring contribution pressure but also innovatively reveals the dynamic shift from informal to formal employment driven by the reduction policy, moving beyond traditional static analysis and expanding the theoretical framework of how social security systems influence firm labor decisions. Second, this study enriches the literature on the determinants of informal employment from the perspective of social security policy. Labor, as a core factor of production, and the influences of its allocation decisions are central academic concerns. However, constrained by data availability, existing literature primarily focuses on formal employment, paying insufficient attention to labor allocation in informal contexts. The limited research on informal employment determinants also tends to focus on economic policies and legal systems, overlooking the more direct factor of social security institutions. This research contributes to a more comprehensive and profound understanding of the impact of social security policies on firm employment. Finally, the paper offers practical implications. It demonstrates that the contribution reduction promotes firm investment in formal employment scale, compensation incentives, and skill training through dual pathways and significantly enhances TFP, providing empirical support for the social security reform direction of “lower rates, broader base, stricter collection.” Moreover, the study highlights the prevalent issues of unequal pay for equal work between informal (e.g., outsourced) and formal employees, alongside a lack of incentives and essential protections for the former. As China's flexible workforce expands, safeguarding the basic rights of informal workers—such as social security coverage—and providing fair and reasonable compensation and benefits are crucial for advancing common prosperity.
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Received: 05 September 2024
Published: 01 August 2025
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| Cite this article: |
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HAN Yadong,YANG Limei,XING Chunbing, et al. Social Security Contribution Reduction and Firm Labor Structure: An Analysis Based on the Choice between Formal Employment and Labor Outsourcing[J]. Journal of Financial Research,
2025, 541(7): 57-75.
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| URL: |
| http://www.jryj.org.cn/EN/ OR http://www.jryj.org.cn/EN/Y2025/V541/I7/57 |
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