Low-Skilled Jobs: The French Strategy

1. New Employment Policies in the European Union The Cicero Foundation, 17-18 April 2008 Low-Skilled Jobs: The French Strategy By Henri Sterdyniak, OFCE henri.sterdyniak@ofce.sciences-po.fr

2. Introduction • The French economy has been unable to tackle mass unemployment since 1974. • The unemployment rate rose from 2.8% in 1974 to 10% in 1986, falling below 9% only in a few episodes (in 2000-2001 and since July 2006). • Over the last thirty years, policies aiming at reducing the unemployment rate have been central in the French economic policy: • macroeconomic strategies to boost GDP growth (like in 1981), • wage moderation (competitive disinflation), • public employment policies, • subsidies for firms hiring some categories of workers (the young, the long-term unemployed), • measures to reduce labour supply (early retirement, allowance for non-working mothers, 35-hour working week), • reforms of unemployment benefits, • reforms of labour law (CNE-Contrat Nouvelle embauche). New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

3. A specific strategy aiming at lowering unemployment or inactivity of so-called unskilled workers, in fact of low wage workers • Cuts in employers’ social contributions reduce the cost of hiring unskilled workers for companies. • The ‘prime pour emploi’ (working tax credit) raises low-wage workers’ incomes, and increases the gap between wage income and assistance benefits in order to increase the incentive for unskilled workers to take a job. • The government has a control over the minimum wages (SMIC) and the minimum income (RMI). • The government has four instruments for three objectives: reducing unskilled workers’ cost for companies, ensuring the level of income for unskilled workers, ensuring the level of income without job. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

4. The French system has high social security contributions and unemployment benefits, which means that a measure increasing employment can have ex post a relatively low cost in terms of public finances. • But a number of effects need to be assessed precisely: • windfall effects : the measures subsidizes jobs that would have been created anyway. • trade-off effects : companies create subsidised jobs instead of non-subsidised one, • Microeconomic substitution : the measure allows the development of low-wage firms at the expense of the other firms) • Macroeconomic substitution if the measure is financed by a rise in another tax). New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

5. 5 Reasons for a specific strategy for unskilled workers: Reason 1.Unskilled workers face a specific unemployment issue: competition from low wage emerging countries Technical progress and capital/labour substitution lead unskilled jobs to disappear in industrial sectors and more and more often in some service sectors. The minimum wage prevents their wages from falling sufficiently However, as concerns unskilled workers, the French situation is not particularly bad relative to major OECD countries: • In 1994: France was ranking 6 over the 13 major OECD countries. So, the non-employment of unskilled workers was not particularly different from other workers in France already in 1994 • In 2004: France ranked 3 behind Japan and Sweden. Perhaps because of policy measures, France ranks among the less ‘bad’ performers today. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

6. 1. Activity and unemployment rates by educational attainment, 2004 New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

7. 2. Difference between employment ratios for tertiary education and less than upper secondary education Source: OECD (2006), Employment Outlook . New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

8. Some doubts • The education level of the population, especially for the young, is on a rising trend while some young graduate people are unemployed or take a job requesting a lower educational attainment. So, there is an other explanation for the disparity of unemployment rates. • In a context of mass unemployment, graduate workers apply for jobs for which they are over-skilled. Having the choice, companies will hire them in priority, the education level giving a signal of ability to work; so non-graduate people do not find jobs. • In this context, the priority is not to increase unskilled labour supply. On the contrary, it would be necessary to increase employment at all levels of the hierarchy, which will free jobs for the unskilled. • A tighter labour market would lead employers to be less demanding when hiring people. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

9. Reasons for a specific strategy for unskilled workers Reason 2.The high levels of the minimum wage (SMIC) and minimum income (RMI) would be a major reason for French unemployment, because it would maintain unskilled workers’ wages at an excessive level. • Labour productivity would be below the SMIC costs, including social contributions, for many unskilled workers and these workers could be hired only at below the minimum wage. • Cuts in employers’ social contributions at average or higher wages could possibly generate increases in gross wages. But as the SMIC is controlled, a cut in employers’ contributions translates necessarily in lower wage costs at that level. • Social contributions exemptions offset the relatively high level of minimum wages in France: the SMIC was roughly half of the average wage; 16% of workers earn the SMIC (but this statistics is not comparable amongst countries). New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

10. 3. Minimum wages in Europe and in the US Source: Eurostat. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

11. 3 bis. Minimum wages in Europe and in the US Source: Eurostat. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

12. According to the mainstream view, an un-employed worker is less productive than those who work. Falls in labour costs allow some unemployed people to become employable. The impact depends on skills distribution. • However, the concept of workers’ individual productivity must be criticised: do unskilled workers have a productivity in value independent of wages level? But why is an unskilled worker paid more in France than in India? • According to our view, the productivity in value is social and historical; unskilled workers benefit from technical progress made in the whole economy; there are a large number of relatively similar unskilled workers; their employment is constrained by labour demand from companies; the impact of lower labour costs depends on the elasticity of labour demand to its cost. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

13. Reasons for a specific strategy for unskilled workers Reason 3.A targeted measure is more efficient than a global measure in terms of job creation to budget costs ratios. It is less costly to create low wage jobs than higher wage jobs. This higher efficiency is amplified if demand for unskilled work is more sensitive to wage costs than skilled work. Reason 4.Lowering the cost of unskilled jobs would allow to create jobs in the services to people sector (domestic care, shops, hotels-cafes-restaurants) that are currently underdeveloped in France, due to the excessive cost of unskilled work. Reason 5.Due to the minimum income (RMI), the gap between wage and insurance benefits incomes is very small for unskilled workers, especially when only part-time jobs are available. Thus, unskilled workers can fall into an “inactivity trap”. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

14. A high level of employer’s social contributions • Social contributions’ cuts aim at reducing the high level of employers’ social contributions in France. In 2004, employers’ social contributions amounted to 11% of GDP in France, to be compared with 7.3% at the EU-15 level. But employees’ contributions were only amounting to 4 % of GDP in France, similar to the EU-15 level (3.9%). • At the average wage level, social contributions (incl. CSG-CRDS) amount to more than 65 percentage point for a gross wage of 100: the employer pays 144, the worker gets 79. The gap is wide between labour cost paid by the company (144) and labour income for the employee (44, accounting for the fact that unemployment allowances amount on average to 35). New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

15. 4. Social contributions rates, January 2006, gross wage = 100 New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

16. How to reduce the social contributions ? • The French social protection system was initially a Bismarkian one. Social protection is linked with activity. Traditionally, benefits were entitled only to workers and funded by employers and employees contributions, with a ceiling. • The ceiling on health contributions has been dismantled between 1967 and 1984, and in 1989 on family benefits. This allowed to avoid the rise in employers’ social contributions for the fraction of their wages below the ceiling. • The financing by contributions is logic for all replacement benefits (unemployment, old age, sickness allowances) which are differed wages and which, according to the Social Security principle, depend on contributions paid. On the other hand, family and health benefits, which are now universal in France, should not be financed by contributions on activity incomes but by general taxes. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

17. How to reduce the social contributions ? • The operation was done for the employees contributions by the creation of the CSG, a proportional tax on households income, but remain to be done for the 18.2 points of employers contributions, family and health. • Three strategies have been discussed in France. • A substitution of employers’ contributions by CSG points so that a single tax is levied on households to finance all universal benefits, which would be socially logical. . This would represent a transfer from households to companies which is not desirable • Some politicians and economists have suggested the introduction of a social VAT replacing employers’ contributions. The idea is that this social VAT would not weigh on labour income but on imports. This is a mistake. • Some economists have suggested a tax on firms’ value added (like in Italy with IRAP) bearing also on exports and investment. This reform would support labour-intensive sectors and would be an incentive for companies to use more labour and less capital. But the government feared that this new tax on profits would generate excessive transfers between companies, and would harm the capital intensive and the more innovative sectors. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

18. A history • Governments unable to lower all employers’ contributions concentrated on falls in low wages. • Social contributions’ cuts on low wages have been progressively implemented since July 1993 (see table 5), with the aim to reduce capital/labour substitution and foreign relocation, to support labour intensive firms and the “services to persons” sector. • Since June 1996, specific social contributions rebates were introduced for companies implementing working-time reduction while creating jobs (Loi Robien, June 1996, Loi Aubry 1, June 1998) • In January 2000, all companies having signed an agreement on the 35-hour week were given contributions’ rebates. The objective was to compensate partly for the rises in wage costs resulting from lower working time. • Since 2003, the cut was no more linked to the 35-hour working week: a single cut was introduced, decreasing from to 1 since 1.7 (them 1.6 SMIC). In 2005, it benefited 10.5 million employees. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

19. 5. Social contributions cuts on low wages New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

20. Chart 1: Employers Social Contributions Cuts (in percentage point) New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

21. The actual cut • In 2008, contributions’ cut decrease with wages: from 26% of monthly gross wage at the SMIC level to 0% for 1.6 SMIC, according to this calculation: (0.26/0.6) x {1.6 x [(smic x hours worked)/monthly gross wage] – 1} where smic is the hourly minimum wage rate, i.e 8.27 euros • The cut is maximum at the SMIC level: it amounts to 326 euros for a gross wage of 1254 euros. Then, the cut decreases (within 1 and 1.6 SMIC) at a marginal rate of 43%: for a 1 euro wage rise, the cut is reduced by 43 cents. • Other measures of a smaller size apply to specific groups of people (the young, the long-term unemployed), to certain geographical areas and finally to domesticservices. • On the whole, contributions cuts amounted to 23.6 billion euro in 2006 (3.3% of wage costs). New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

22. 6. Contributions’ cuts in 2006 6 bis. Evolution of general contribution cuts (in billion euros) New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

23. SMIC and average wage • Contributions’ cuts on low wages will be an incentive for low skilled employment at the condition that they effectively reduce labour costs and do not generate a rise in the SMIC. Since 1993, the SMIC increased more rapidly than average wages (0.5% per year on average). The total effect can be estimated at 6.5%. This rise comes from the rises in the SMIC at the time of the adoption of the 35 hour-working week. 7. Rises in the SMIC and average wages (hourly) New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

24. Social contributions’ cuts on low wages: what does research analysis say? The economic impact of social contributions’ cuts has been analysed by a large variety of studies. Employers’ social contributions cuts play through 6 channels: • Substitution effects at the company level: each company has an incentive to use more unskilled work and less skilled work and capital for a given level of output. • Substitution effects between companies: companies with many low wages have an advantage as compared to the others. • In these two cases, there may be a positive impact on output if the market for unskilled labour is in a situation of under-employment while the market for skilled labour is at full employment. • If the market for unskilled workers is in a situation of classical equilibrium, then real wage cuts will make it pay to hire unskilled workers. This will raise output and hence skilled workers employment. • The reduction in costs allows companies to cut their selling prices, which leads output to rise. • If the cut is not self-financing, the cut must be financed by the increase of another tax with a negative impact on activity and employment. Unskilled jobs will increase in any case, but skilled jobs will either decrease or increase. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

25. Four arguments against the progressiveness of social contributions • The measure generates windfall effects to companies that would anyway hire unskilled workers or to theses workers themselves if their wages rise. • The measure would deteriorate the quality of available jobs ; this would be detrimental to long-term growth. • The measure disincentives unskilled workers to acquire skills. But a rising unskilled unemployment and increasing wage inequalities are a priori a strong incentive to get skilled. The unskilled acquire skills more easily when they have a job than if they remain unemployed. • Windfall effects would be smaller if the measure focused on the unskilled who really cannot take a job. Brown et al. (2006) have suggested restricting subsidies to the long-term unemployed unskilled workers. But this measure It does not encourage firms to create unskilled jobs but only to hire long-term unemployed workers: the unemployment rate would not be lowered, but would affect different groups of workers. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

26. A first simple model • Let us consider the impact of current contributions’ cuts in a simple model: • Contributions’ cuts are 26 percentage points at the SMIC level and decrease linearly until they become nil at 1.6 times SMIC • The cuts apply to all employees in the private sector, i.e. 14.5 million in full-time equivalent. 10 categories of employees are considered depending on wage levels. • Let us assume that employment/wage elasticity varies from 1.0 for lower wages to 0.2 for higher wages. Moreover, there is a substitution elasticity between employees’ categories, the elasticity is 0.2 for two adjoining groups. • The current measure would cost on average 1500 euros per employee in FTE (125 euros per month); 21.75 billions euros. It would have created 626 400 jobs (4.3%), i.e 34 720 euro per job. • Accounting for employers’ contributions (rate: 42%) and employees’ contributions (rate: 21%), these jobs would bring 10.75 billion euros in terms of Social Security funding. The net cost of the measure would then be: 11 billion euros, i.e. 17 560 euros per job. The measure remains costly. • Direct job creation at the SMIC level has a (gross) cost of 21 370 euros, but 6 621 euros ex post.. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

27. 8. Impact of contributions’ cuts in 2006 New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

28. A second simple model • Let us consider that the economy is in a classical unemployment situation: companies’ output is not constrained by demand but by the real wage level. • In order to cut the wage bill by 10%, the government cuts the employees’ social contribution rate from 42 down to 28. This leads companies to increase the number of their workers by a * 10 %, where a is the elasticity of employment to cost. Companies benefit from a windfall effect on the workers they would have hired anyway. The total cost for public finances is: 14 - 9.8 a. The cut will have a positive impact on public finances if a is higher than 1.4. The cut must be financed otherwise. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

29. 9. Impact of employers’ social contributions cuts in a situation of classical unemployment *Unemployment benefits assumed to be on average 35% of gross wages. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

30. Statistical Studies • The unskilled jobs to total employment ratio was 28% in 1982, decreased to 23% in 1992 and remained stable since the introduction of social contributions’ cuts on low wages: 24% in 2002. • This suggest that contributions’ cuts allowed for maintaining a number of unskilled jobs, amounting to 4% of total employment (580 000 jobs). But it may also suggest that companies substituted unskilled to skilled jobs. • Contributions’ cuts benefit mainly small companies. The apparent cut to wage costs is 5.9% for companies with less than 10 employees; 4 % for companies with 50 to 99 employees; 3.1% for companies with 250 to 499 employees, 1.3 % for companies with more than 500 employees. • The apparent ratio is 4.6 % on average, but 11% for hotels-restaurants, 9.8 % for retail trade, 8.3 % in services to companies. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

31. Synthetic Table comparing all Studies • Last column shows job creation for 10 billion euro, which is the amount of contributions’ cuts in 1997 (before the introduction of the 35-hour week) and half of today’s measures. • The majority of these works is based on calibrated models. Parameters are not estimated. The functioning of the French economy is postulated: the demand for unskilled labour is constrained by the level of the SMIC. Skilled workers are at full employment. • Most of these studies estimate that 300 000 jobs are created for a 10 billion cuts in social contributions ex ante. There are 4 main exceptions. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

32. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

33. Laroque and Salanié (2000) use a microeconomic simulation model. They assume that wages equal marginal labour productivity, itself depending on the worker’ characteristics (gender, age, education). • The employers’ contributions cut implemented in 1997 has two consequences: • People with a productivity between 87% of the SMIC and the SMIC become employable; • Workers earning between 1 SMIC and 1.33 times SMIC benefit from a wage rise (companies refund them the employers’ contributions cuts) from 14.7% to 0. • The authors estimate that 430 000 people in the first category of recipients (all workers with wages within the SMIC and 113% of the SMIC in 1997). In addition, the wage rises resulting from the contributions’ cut would have attracted 60 000 people on the labour market. The effect of the cut is thus of 490.000 jobs in 1997. • This model is not realistic: firms did not increase wages at the SMIC level by 14.7%; a 5% rise in the SMIC does not result in firing workers earning between 1 and 1.05 times the SMIC: firms always need cashiers and shopkeepers. The concept of individual productivity does not have any meaning. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

34. Crepon and Desplatz (2001) make a microeconometric comparison of companies’ behaviour depending of the benefit they get from the contribution cuts implemented between 1995 and 1997. They conclude that these cuts would have created 460.000 jobs. • Cuts would have played immediately, without delay contrary to one would expect, but the authors claim that cuts would have in fact slowed down job destruction. • However, the results are debatable: • the rise in employment results from a big rise in production and a strong fall in prices - not from substitution effects; • GDP increases by 0.65% per year and employment by 0.7%; • created jobs would be almost half skilled jobs (220 000) and half unskilled jobs; • the transition from micro-macro is rough: 460.000 jobs represent the difference between jobs created by the firms having benefited from the cuts compared to the jobs created by companies that did not benefit from cuts. But these firms must have suffered from the cut if the effect translated in falls in prices in the firms benefiting from the cuts. • Last, from 1994 to 1997, GDP growth was 2.05% per year in the EU-12 and 1.55% in France: according to the authors, without the contributions’ cut, French GDP would have grown by 0.9% only. This it is not very credible. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

35. Gafsi et al. (2004) use information at industry level. The production function combines three factors: skilled labour, unskilled labour, capital. Skilled and unskilled labours appear substitutable, with an elasticity of 2. Wages are endogenous. Unfortunately, the authors suppose that workers consider social security contributions as differed wages and so they claim for wage increases to compensate for the falls in employers’ contributions. But, obviously, this mechanism does not play for compensated cuts, without impact on benefits. On the whole, the 1999 cut would have created 118,000 unskilled jobs, but 51,000 skilled jobs would have been destructed, with the total impact of the measure being 70.000 only. • Jamet (2005) presents also an analysis at industry level. It shows that the revival of unskilled employment intervenes especially in the services and the construction, and not in manufacturing.. Its modelling supposes that the skilled workers are in full employment, but it takes account of heterogeneities between the sectors and of the fact that the sectors which strongly profit from the contributions cuts reductions lower their prices and gain some shares of market. The article gives three estimates of the effect of the cut in place in 1997 according to the elasticity of unskilled employment to its cost. In its higher estimation (1.2), the cut increases unskilled employment by 164.000. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

36. The state of the debate • Social security contributions cuts on low wages cost approximately 18 billion euros today, i.e. 1% of GDP. They are often questioned, because their impact on employment is difficult to assess. An average estimate of about 550,000 jobs created would have an ex post cost of 9 billion euro, i.e. 17,600 euros per job. • Cahuc (2003) consider higher numbers of jobs created and recommend to extend the measure (up to a 0 rate for employees and employers’ social contributions at the SMIC level versus 30 percentage points currently) Is it necessary to widen the low-wage trap? Is it necessary to concentrate all measures on unskilled jobs? • The Cour des Comptes (2006) recommends to replace them by policies to subsidize firms or R&D programs to increase innovation and by active policies for the unemployed (training programmes). It recommends either to reduce the contributions cuts’ threshold to 1.3 down from 1.6 SMIC (gain: 7 billion euros for public finances), or to restrict them only to companies with less than 20 salaries (gain: 9.5 billion euros). Should employment policy take that risk? We do not think so. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

37. A Working Tax Credit (PPE) • In 1987, the Rocard government introduced a minimum income, the RMI, a differential benefit for the unemployed accounting for their family situation. In principle, the RMI is entitled only to people who make efforts to be back on employment, but this restriction does not apply in practice. • As the SMIC aims at ensuring a minimum living standard for workers, the RMI cannot be significantly lower. So a worker married and earning 0.5 SMIC has a lower income than the RMI: his work does not pay. • Some economists consider this crates an unemployment trap. A majority of RMI earners would prefer to receive this benefit than search for a job that will provide them a very small marginal income. • Wage earnings (at the SMIC level, or even at ½ SMIC) must remain significantly higher than the RMI to bring unemployed people back to work. It is not only an incentive to work, it is also fair: it is desirable that work be always rewarded. • Two options are then possible: abolishing the RMI, but this has never been suggested ; introducing a specific subsidy for low skilled jobs. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

38. A Working Tax Credit (PPE) • However, the small gap between the RMI and the SMIC does not seem to prevent RMI earners from taking a job at the SMIC level. • The huge success of SMIC paid part-time jobs (saleswomen or cashiers) illustrates that the problem is on the demand side and not on labour supply. • A large majority of unskilled unemployed do not succeed to find a job and it is not their first choice to live on the RMI. • Workers prefer to have a low-paid job, giving them a social status and entitlement to old-age pension, to be ‘socially inserted’ in the society and to have career prospects rather than stay on benefits. There are of course exceptions, but in a context of high unemployment, these exceptions do not have an impact on total employment. Who cares if Paul does not want to take the job Jeanne will be happy to take? • From 1997 to 2001, when there was rapid growth in France there were labour shortages only for very specific skilled jobs but not for SMIC workers. If the French economy suffers from skilled labour shortages, trying to bring back to work unskilled workers will not help. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

39. A Working Tax Credit (PPE) • In 1998 a first measure aiming at making work pay on a transitory basis was introduced: the RMI incentive (the intéressement). This system entitled a RMI earner to continue to benefit from part of the RMI in the first year after starting a job, as only half of wage earnings were taken into account for the calculation of the RMI. • Let us consider the example of a couple with two children. If they do not work, they get the RMI: 767 euros; a job paid at 0.5 SMIC (621 euros) will not pay. Owing to the incentive system, they will still benefit from a RMI of 399 euros; the job will increase their income by 250 euros. • This measure makes a part-time job always pay more than staying on the RMI and slightly raises the gains of taking a full-time job. But it plays on a temporarily basis only: after one year, no RMI is paid anymore, the family income falls; it is then necessary to be back fully on the RMI to be entitled to the incentive later again. The system is not satisfactory. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

40. A Working Tax Credit (PPE) • A working tax credit (Prime pour l’emploi (PPE)) has been introduced in 2001 in addition to employers’ contributions cuts. In the same time, housing allowances, dwellings taxation, income taxation were modified to allow low-wage workers to be entitled to benefits previously entitled to RMI earners only. • The legislation of the PPE is very complex. It is a refundable tax credit paid to low-wage workers. The PPE is calculated on the basis of the wages of year t, but paid in October of year t+1 (when taxpayers pay their income taxes).The PPE is calculated per individual. However, a ceiling applies on family incomes. • Minimum wage workers receive a bonus (7.7% of wages in 2007) to increase the gap between the SMIC and the RMI and thus their incentive to work. This bonus decreases linearly until 1.3 times the SMIC. But the bonus is 14.2 % of wages for part-time jobs in order to increase part-time work. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

41. Chart 2: PPE’s allowance (in euros, per year, in 2005, 2004 income) * The two earners of the couple are assumed to have similar incomes. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

42. Table 13 shows the monthly gains resulting from taking a job in 2005. • Due to the complexity of the system, especially because RMI’s rules are not consistent with those of family allowances, these monthly gains vary significantly from one case to another. • Due to its low value, the PPE does not alter this situation much. Leaving the RMI for a SMIC paid job does not really pay for the 1st worker of the family. A job paid at 0.5 SMIC will not really pay for the 1st worker of the family; it will slightly pay for a single. The job (half-time or full time) will always pay for the 2nd worker of the family. • The PPE helps leaving inactivity for a full-time job, but not for part-time jobs. It also benefits people who have no real incentive, like couples earning 2 SMIC. • In 2005, PPE has an annual cost of 2.5 billon euros and benefited 9.4 million households, mainly at 2nd, 3rd and 4th income deciles. For 2007, the cost is estimated to reach 3.7 billion euros. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

43. 13. Gains from taking a work in 2005 (in euros, per month) New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

44. The PPE’s impact on employment • Models explaining households’ labour supply are particularly difficult to build because of the complexity of the French tax and benefit system and of the labour market situation. • In the French system, most taxes and benefits are calculated on a family basis. So activity decisions of the two members of the couple must be modelled simultaneously. Many works avoid this difficulty in studying only women participation, men being supposed not to modify their labour supply. • The models have many difficulties in predicting individual behaviours. Most models assume that workers choose freely their working time. In fact, around 30% of women who work part-time would like to work full-time. In general, the models explain very badly part-time work. • It is necessary to evaluate the income of households with only one adult working. The PPE increases the marginal gain to work for workers at the SMIC level, but the income effect plays in the opposite direction. The work incentive may be reduced in some cases for married women, if their decision to take a job will mean their husband will be no more entitled to the PPE. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

45. The PPE’s impact on employment • Four studies have provided an ex ante estimate of the PPE’s impact on labour supply with micro-simulation methods and only two studies ex post estimates by “differences-in-differences” methods. • Ex ante estimations are very low : +0.2% for women employment (INES, 2003); +0.4% for global employment (Choné, 2002), +10 000 (Laroque-Salanié, 2002), +0.4% for women employment (Bargain,2004). • Ex post estmation gives an reduction of married women employment (-30 000, Stancanelli, 2004) or a small positive effect (+65 000 jobs, Arnaud, 2005). • According to these studies, none of the existing or suggested measures would have a significant effect on (female) labour supply. Should it be concluded from it that there is not inactivity trap? Or, on the contrary, that the trap is very deep? New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

46. How to reform the PPE • To turn the PPE into a low-wage subsidy, which would rely only on the hourly wage. The PPE could then be paid monthly with wages. The PPE would be only an incentive to bring back to work unskilled people without any distributional goals. It would benefit spouses at low hourly wages, without considering the husband earnings. However, this allowance would not be a significant incentive to take a part-time job. The allowance would be similar with the employers’ contributions cuts: a subsidy for unskilled labour of 6% is equivalent to a 6% rise in the SMIC decided simultaneously with a 6% rise in the employers’ contributions cut. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

47. How to reform the PPE : the RSA • To create an income allowance (IA), such as: IA = RMI – 50% * WE, where IA is the allowance, RMI is the allowance paid to a family without resources, WE the wage earnings. Hence, a worker would always retain 50% of his wages. The intéressement would become permanent. • The gain from taking work would always be significant, even for part-time jobs (see table 13). This allowance would raise the poor working families’ incomes. The allocation would be given on a monthly basis, with a social control from the public agency (CAF or ANPE or local authorities). • It would have two drawbacks: making part-time jobs acceptable and hence favouring their development. It could have a negative impact on spouses’ work in low-skilled couples. • The RSA, revenu de solidarité active, was in the program of Ségolène Royal and, in May 2007, Nicolas Sarkozy named Martin Hirsch High-Commissioner to experiment it. • The reform would be costly (3 milliards) and would need to suppress the PPE. Couples with 2 SMIC would loose the PPE, which is politically difficult. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

48. Some contradictions… An employee, single and at paid at the SMIC level: • pays 440 euros of unemployment and pensions contributions, representing differed wages; • costs his company (for a 35-hour working week) 1 477 euros • receives a net transfer of 110 euros (PPE + housing allowance - CSG – Income tax - health and family contributions); and so has 1127 euros of disposable income. So there is no net fiscal and social burden for workers at the SMIC level; health insurance is free for them. Their living standard is disconnected from their labour costs But contribution cuts, in theory refunded by the State, weaken the financing of the Social security. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

49. Some contradictions… • Companies are given an incentive to create specific unskilled jobs, without prospects in terms of promotion, trapped in low wages, since rising wages is very costly for the employer and not very rewarding for the employee: a 10% wage rise for a SMIC worker (+125 euros) costs the company 271 euros and provides the employer 22 euros. • These jobs bring downwards wages of medium-skilled workers. • Unskilled jobs do not match the rising education level of the young people. So this set of measures will need to be changed in the future. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008

50. Some contradictions…. • Part-time work incentives lead companies to have more and more part-time unskilled jobs. This provides a greater flexibility to companies. But unskilled workers (women in 80% of cases) cannot find full-time jobs any more. They have to live with one or two part-time jobs, flexible hours, without any promotion prospect. • Families with one or two unskilled workers, working part-time become ‘poor worker’ families and this category is rising in France. • The work incentive strategy is based on maintaining a significant gap between the RMI and the SMIC. There is a risk is that this gap is obtained through downward pressure on the RMI level. In the last 13 years, the RMI was increased by 4,5% in terms of purchasing power, losing between 10 and 23% relative to the SMIC for 35 or 39 hour working weeks. New Employment Policies in the European Union, Cicero Fondation 17-18 April 2008