Do social insurance contribution subsidies reduce undeclared work? Evidence from South Korea

Using registries on the universe of small establishments in South Korea, we examine the effects of subsidizing social insurance contribution to the National Pension and the Unemployment Insurance on the number of covered workers. Exploiting variations in location which affected eligibility for the pilot program of the subsidy, we implement a difference-in-differences (DiD) estimation to identify the effect of subsidies on social insurance coverage. Our DiD estimates show that the subsidy scheme increased the number of workers registered with the National Pension by 0.66 percent. In contrast, we find little effects of the subsidy scheme on the number of workers registered with the Unemployment Insurance. The estimated effects are smaller in size than those reported in previous studies, implying massive fiscal drains from the subsidy program. Our findings suggest that subsidizing social insurance contributions alone may not be effective in closing the coverage gap in social insurance and can be quite costly in countries with weak enforcement.