Impact of social insurance law on total factor productivity: evidence from Chinese micro and small businesses

Our study investigates the impact of China’s 2011 Social Insurance (SI) Law on the Total Factor Productivity (TFP) of micro and small businesses (MSBs). Using the difference-in-differences (DiD) model, we found that the SI Law’s implementation resulted in a significant decline in TFP levels within MSBs owing to increased social security contributions. Mechanism analysis indicates that the incremental costs cannot be shifted onto employees through wage adjustments or workforce reduction and curb firms’ capital investments, subsequently affecting capital intensity and overall business productivity. Furthermore, heterogeneity analysis underscores that the SI Law’s effects on TFP are most pronounced in MSBs within the manufacturing sector, characterized by financial constraints, or situated in provinces with high enforcement intensity and greater factor market distortions. Further analysis reveals that the SI Law reduces labour productivity levels among MSBs, with the majority of the impact directly stemming directly from the SI Law, while the remaining effect is mediated through capital-labour intensity and TFP, respectively. Our study contributes to the existing literature by offering new insights from MSBs in an emerging market context, and the findings offer significant policy implications.