The Effects of Social Insurance Premium on Employment, Labor Costs, and Revenue: Evidence from Japan

Expanding the coverage of employees’ social insurance leads to higher social insurance premiums paid by firms, potentially affecting employment and firm revenue. We examine these effects using the reform of Japan’s social insurance in 2016, which extended the social insurance coverage of part-time workers from those working at least 30 hours per week to those working 20 hours or more per week, as a quasi-natural experiment. Employing a difference-in-differences approach in which we compare firms with a higher share of part-time workers in the pre-reform year and those with a lower share, we obtain the following findings. First, firms substituted significant amounts of part-time workers with regular workers, but not with capital. Second, total labor costs including social insurance premiums paid by firms increased. Third, firms saw a significant increase in sales revenues but a reduction in profit ratios, suggesting that the increased labor costs were primarily absorbed by firms and buyers due to a partial pass-through of labor costs to output prices. Fourth, high-growth firms were more likely to substitute part-time workers with regular workers and to pass the higher labor costs through to output prices.