Labor protection policy and firm markup: Evidence from the implementation of the China social insurance law

• Our study reveals the contribution of social insurance premium collection to firm markup. • Enhancing managers' long-term philosophy and optimizing capital allocation are the mechanisms that drive this effect. • The relationship between the Social Insurance Law and markup is more pronounced among non-state enterprises. The implementation of China’s Social Insurance Law (SIL) has led to changes in the standardization of social insurance premium collection and administration and the establishment of an important labor protection policy. This study examines the effects of SIL on Chinese firms’ markup. This study employs a difference-in-differences model using China-specific data to analyze the contribution of social insurance premium collection to firm markup following the SIL implementation. Our findings indicate that enhancing managers’ long-term philosophy and optimizing capital allocation contribute to this effect. Furthermore, our heterogeneity analyses reveal that the relationship between SIL and markup is more pronounced among non-state enterprises, central and western regions, and industries with low fiscal pressure. Our findings offer policymakers valuable insights into how labor protection policies influence markups in emerging market countries.