The Labour Market Effects of Increases in Social Insurance Premium: Evidence from Japan
| Date | 01 October 2018 |
| Author | Naomi Kodama,Izumi Yokoyama |
| DOI | http://doi.org/10.1111/obes.12226 |
| Published date | 01 October 2018 |
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©2018 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 80, 5 (2018) 0305–9049
doi: 10.1111/obes.12226
The Labour Market Effects of Increases in Social
Insurance Premium: Evidence from Japan*
Naomi Kodama†,‡ and Izumi Yokoyama†
†Graduate school of Economics, Hitotsubashi University, 2-1 Naka, Kunitachi, Tokyo,
186-8601, Japan (e-mail: kodama.naomi@r.hit-u.ac.jp; izumi.yokoyama@r.hit-u.ac.jp)
‡Research Institute of Economy, Trade and Industry, 11th floor, Annex, Ministry of
Economy, Trade and Industry (METI) 1-3-1, Kasumigaseki Chiyoda-ku, Tokyo, 100-8901,
Japan
Abstract
Exploiting heterogeneous variations in labour cost increases due to Japan’s 2003 social
insurance premium reform as a natural experiment, we estimate the impacts of the increased
social insurance premiums on employment, working hours and payroll costs. Using the
difference-in-differences method with establishmentfixed effects, we find that firms reduce
the number of employees and increase average annual earnings from longer working hours
in response to an exogenous increase in labour costs without productivity gains. Firms
manage to pay for this increase in the average wage paid to the remaining workers by
reducing the number of employees to keep total payrollcosts unchanged. In contrast, since
social insurance premiums are shared equally between employees and employers, firms pay
the remaining half premiums that they are imposed with. Sub-sample analyses show that
firms adhering to a labour hoarding policy did fire many workers taking advantage of the
2003 reform. This may indicate that the reform provided a good excuseto cut employment
in firms that had been forced to comply with a labour hoarding policy even in an over-
employment situation, which is more likely in sectors and countries where dismissals are
rigorously regulated.
JEL Classification numbers: J33, J38, H20.
*The authors are grateful to Debopam Bhattacharya, and two anonymous referees. We thank Shun-ichiro Bessho,
Christina Gathmann, Yuji Genda, Junya Hamaaki, Yoshio Higuchi, Seiichi Inagaki, Tomohiko Inui, Hiroshi Iwano,
Beata Javorcik,Ryo Kambayashi, TakaoKato, Keisuke Kawada, Daiji Kawaguchi, NobuyoshiKikuchi, Miki Kohara,
AyakoKondo, KoyoMiyoshi, Masayuki Morikawa,Akira Nagae, Fumio Ohtake, Hideo Owan, Shimpei Sano, Masaru
Sasaki, Hitoshi Shigeoka, Eiji Tajika, and Masayuki Takahara, as well as participants at the International Institute
of Public Finance, the 4th Conference of the International Associationfor Applied Econometrics, theTokyo Labor
Economics Workshop,the Japanese Economic Association, the Kansai Labor Workshop, and the microdata seminar
at Hitotsubashi University,who provided invaluable advices.This study was conducted as part of a project of the Joint
Usage and Research Center, the Institute of Economic Research, Hitotsubashi University, and Research Institute of
Economic, Trade and Industry.
Impacts of labour costs increase 993
I. Introduction
For most firms in developed countries, the burden of social insurance premiums for their
employeescan be substantial costs, along with tax burdens. Although some countries relieve
the tax burden, or keep it low to reinforce international competitiveness, firms in many
countries are bearing a greater burden of social welfare and pension expenses, and this trend
has been getting stronger as populations age.1Japan is not an exception to this, and social
insurance premiums in Japan are known to have been high and increasing gradually over
the last 20 years with the rapid aging of the population. Since an increase in labour costs
could hurt firms’ profits and thus can affect labour demand as well, an increase in labour
costs without productivity gains can have a negative effect on both firms and workers. In
spite of the fact that it is extremely important to understand the impact of the social welfare
burden on employment and labour demand, there are few studies discussing the impacts
of an increase in social insurance premiums from the labour demand side. This is because,
in many cases, we cannot identify the policy impact due to the fact that social policy and
law, in general, are uniformly changed and implemented within a country.
However, an exceptional case occurred in Japan in 2003: the standard of calculation of
the social insurance premium rate changed across the board, but the degree of influence of
the reform depended on the past bonus-to-salary ratio; that is, it was heterogeneous among
firms, creating variation in the policy changes. Utilizing this heterogeneity, we estimate
the impact of the 2003 reform on various labour-related outcomes such as employment,
hours worked, and total payroll costs.After the reform, the insurance premiums came to be
calculated based on total annual earnings, whereas the premiums were calculated based on
the monthly salary alone before the reform. This is the reason why the 2003 reform of the
social insurance premiums is referred to as the introduction of ‘the total reward system’.
More specifically, the premium rate for bonuses increased from 2.00% to 21.87%, while
that for the monthly salary decreased from 25.96% to 21.87% to balance out the overall
insurance budget. Theoretically, if firms had not changed any variable at the timing of
the reform, firms whose bonus-to-salary ratio was originally relatively high should have
experienced an increase in labour costs as a result of this reform, while others should have
experienced a decrease in labour costs.
In sum, even though the social insurance premium rates were uniformly changed
throughout the nation, the impacts of the reform on firms varied depending on the orig-
inal bonus-to-salary ratio that had been applied by each firm until that time. The 2003
reform increased the insurance premiums for firms with a higher bonus-to-salary ratio
more drastically if they paid exactly the same salary and bonuses even after the reform.
Even if firms became aware of the reform before 2002, they should not havechanged their
bonus-to-salary ratio until 2002 because they would have had to pay more in insurance
premiums until 2002. In contrast, after the 2003 reform, firms should not have an incentive
to change their bonus-to-salary ratio because they could not save the premium burden by
changing their bonus-to-salary ratio when the premium rate for bonuses was same as that
for the monthly salary.We believethat our findings may be applicable not only in Japan, but
1For example, the percentages for social insurance premiums and of the tax burden to national income,
respectively, are 7.4% and 23.3% in the US; 10.7% and 37.0% in the UK; 29.5% and 21.7% in Germany;
36.7% and 25.2% in France; and 24.1% and 17.5% in Japan. (National Tax Agency, Japan).
©2018 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd
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