| Abstract | This paper puts forward a structural model in which parameters of demand function and production function can be estimated at the same time, and uses it to evaluate the effect of social security fee-reduction to employment, price, and social security revenue. Using 10 Chinese service sectors’ data from National Tax Survey Database during 2007-2011, we have a lot of interesting findings relates to social security fee-reduction. Firstly, there is remarkable employment effect, 4 percentage points’ social security fee-reduction can increase firm’s labor demand about 8 percentage points. Secondly, even though there are huge differences in the distribution of markups among service sectors, all the 10 sectors show the same pass through pattern: in face of the decrease of labor cost, firms choose employ more labor than rise the service price. 4 points’ fee-reduction on brings about 0.73 points’ price-reduction. Thirdly, social security fee-reduction can significantly improve resource allocation in Chinese service sectors. Higher productivity firms grow faster than others and enjoy more market share after fee-reduction. Fourthly, small scale service firms are more sensitive to the change of labor cost. The role of social security fee-reduction on stimulate overall employment is rather important due to huge number of small scale service firms, especially facing the uncertainty of recent trade friction. Meanwhile, it’s also important to find substitutional social security fund sources due to the remarkable shrink after social security fee-reduction. |