Social security contribution is a substantial component of firm labor costs. This paper examines the impact mechanisms of the social security contribution rate on firm entry and employment within a search-and-matching framework. To empirically evaluate these effects, this paper constructs a three-dimensional panel dataset spanning cities, industries, and years, drawing on social security records from the Chinese State Administration of Taxation (SAT), firm registration data from the State Administration for Industry and Commerce (SAIC), and Chinese urban statistical yearbooks from 2008 to 2015. Leveraging the 2011 implementation of the Social Security Law as a quasi-natural experiment, this paper employs a difference-in-differences (DID) strategy to identify the causal effects of rising contribution rates on firm dynamics and labor outcomes. The findings show that increases in the social security contribution rate significantly reduce firm entry and suppress employment growth, with particularly pronounced effects among small and micro enterprises and in cities with a lower share of state-owned enterprises. The effects do not vary significantly with the lower bound of the city-level contribution base. Mechanism analysis indicates that the rise in contribution rates primarily depresses employment by elevating nominal wages and overall labor costs. This suggests that the post-reform increase in contribution burden was largely absorbed by firms, reshaping their cost structures and suppressing R&D investment. The reduction in R&D is accompanied by a rise in capital-labor ratios and labor productivity, driven by capital deepening and workforce contraction. These results imply that higher social security contributions prompt short-term capital substitution while crowding out long-term innovation. This paper offers policy insights into how tax relief policies can support stable employment and stimulate market vitality.