Education and welfare program compliance: Firm-level evidence from a pension reform in China

This study examines how firms with heterogeneous human capital quality respond differently to a welfare policy shock. In 2002, China expanded pension mandates from state-owned enterprises (SOEs) to private enterprises. Based on data covering all median and large manufacturers in China (around 250,000 firms), we find that their compliance rates varied widely across firms and increased in the average education level of employees. Utilizing these heterogeneous responses at the firm level, we estimate that the pension reform might have increased the return to education of employees by 8.75%. To address endogeneity in firms' human capital levels, we exploit the historical scale of local university as an instrumental variable. Moreover, we use SOEs as a control group, which was not directly affected by the policy shock. We find our empirical estimates robust to both measures.