Social insurance law and firm markup in China

Abstract

As labor protection policies become widespread globally, assessing the economic impact of these policies is critical to business decision-making. However, the relationship between labor cost and enterprise markup has not been confirmed in the existing literature. Based on China's Social Insurance Law, we examine the issue by using a difference-in-differences model and the data from Chinese listed firms. We find that after the implementation of the Social Insurance Law, the markups of labor-intensive firms were significantly reduced compared with non-labor-intensive ones. The main mechanism driving the markup decline is the price effect caused by market share competition. Further tests suggest that the adverse influence is greater for firms with fewer financing constraints, enterprises in highly marketized areas, and nonstate-owned ones. Our research shows that the mechanism of labor protection policies' impact on markup should not only analyze the factor market but also extend to the product market.