How social security contributions reshape migration in a spatial equilibrium

We use the social security contribution (SSC) base as a policy shock and build a spatial equilibrium model to analyse how labour costs affect skill migration. In this model, high- and low-skilled workers make migration choices to maximize utility based on wages, housing rent, and other welfare measures. The labour cost consists of wages and the SSC base, and the enterprise selects its labour demand based on labour cost. In other words, the SSC base decrease causes a labour cost decrease and labour demand increase. From a spatial equilibrium perspective, labour demand increasing leads to wages increasing, and labourers migrating into such cities. Combining China’s population census and the China Migrants Dynamic Survey, we estimate the structural parameters of the model. The results show that for every 1% increase in the SSC base, the relative cost of low- to high-skilled labour among migrants increases by 0.17%. The 2019 Comprehensive Program for Reducing Social Insurance Premium Rates caused a decline in the SSC base, and we simulate the impact of labour costs on a city’s skills. The results show that the policy significantly reduces labour costs, increases labour utility, and has a strong impact on low-skilled labour.