data from the MOHRSS suggest that 30 and 41 percent of rural migrants participated in health and work injury insurance, respectively, but only 13 and 21 percent participated in unemployment insurance and pension programs. Mandatory (and enforced) provisions for employers and enterprises in mining and construction sectors, and for jobs with dangerous work, likely contributed to raising the participation rate for work injury insurance.

Alternatively, rural migrants may choose to participate in social insurance through programs based in their home counties. The new rural collective medical insurance scheme (NRCMS) should be available to all rural migrants, but using the insurance typically requires visiting medical care providers in their home counties and thus they frequently do not participate (some counties allow NRCMS enrollees to use providers in current locations). A new rural pension scheme was only implemented recently, and participation in this program is unlikely to show up in the data available at the time of this study.

# **3.2 High Contribution Rates Discourage Employer Compliance and Worker Participation**

Financed by combined employer and employee contributions of 40 to 42 percent of payroll for the five basic insurance programs and a further 10 percent or more for housing funds,<sup>23</sup> China’s urban social insurance system carries heavy burdens for both employers and workers, and may carry significant implications for China’s long–run competitiveness. Moreover, this high implied _labor tax wedge_ likely encourages informalization of the labor market: employers under-report wages and game the system in numerous ways, while workers have incentives to opt out of participation in social insurance schemes.<sup>24</sup> As in other developing countries, high mandated contribution rates provide strong incentive for employers to evade compliance through the use of labor dispatch services and under-reporting of employment and wages (Gallagher et al., 2012; Wang and Zhu, 2010).<sup>25</sup> This phenomenon is particularly pervasive among private enterprises and self-employed businesses, but it occurs even among firms with considerable state or foreign investment. While estimated evasion rates have fallen from a high of 41 percent in 2000 to 2.4

> much lower than in other provices (See Wang, et al., 2010).  Other prefectures have merged rural and urban resident pension schemes for rural workers from the same prefecture.

> 23The compulsory Housing Fund collects contributions from both workers and employers. On average, workers and employers each contribute 5 percent of the individual wage bill, but rates vary significantly across regions.

> 24Strictly speaking, these contributions are not taxes. They are paid into individual and social pooling accounts to which workers may eventually have a claim. Nonetheless, we follow conventions in the international literature in referring to the ratio of the combined contribution to wages paid as the “tax wedge.” Recall also that we follow the International Labor Organization standard in defining workers who do not have social insurance coverage to be “informal.”

> 25This phenomenon is quite common in other countries as well. Perry et al (2007) document how efforts to avoid high contribution rates contributes to efforts to avoid formal contracts in Latin America. Cahuc and Postel-Vinay (2002) suggest that restrictive employment protections may create incentives for firms to hire workers on shortterm temporary contracts.

11