Reducing the cost of labour. One way to boost French competitiveness

Some economists specializing in the labour market regularly call for more precise targeting of payroll tax cuts on low salaries. This note examines whether their arguments stand up, and proposes an alternative scenario in which reductions in employer’s contributions would be aimed at intermediate salaries equivalent to around 1.6 to 3.5 times the minimum wage. This measure would give a greater boost to competitiveness, without compromising jobs.

By Gilles Koléda
The 17/06/2015

Now that the CICE and the Responsibility Pact are fully operational, the package of measures to reduce the cost of labour adds up to nearly 50 billion euro (general reductions on low salaries, CICE and Responsibility Pact). Around 52% of these reductions will concern pay lower than 1.3 times the minimum wage, and 67% will concern pay lower than 1.5 times the minimum wage. However, some economists specializing in the labour market regularly call for even more precise targeting of payroll tax cuts on low salaries.

This note examines whether their arguments stand up, and proposes an alternative scenario in which reductions in employer’s contributions would be aimed at intermediate salaries equivalent to around 1.6 to 3.5 times the minimum wage. This measure would give a greater boost to competitiveness, without compromising jobs. Simulations, based on a reduction of 10 billion euro financed by a hike in VAT, produce the following results. The ideal scenario, in terms of improving both the external balance and employment, involves a hypothetic targeting of sectors exposed to international competition. Improved competitiveness of our products would lead to more exports, and so create the jobs required to produce exported goods and services, and indirect jobs. GDP would be more than 0.6 points higher than that of the reference account after ten years. The improved external balance would contribute slightly less than 0.4 points. Around 130,000 additional jobs would be created compared to the baseline scenario, 77,000 of them in industry.

Conversely, the least effective targeting concerns non-tradable sectors. These sectors disseminate little to the rest of the economy and their price elasticity of demand is relatively low, so that the economic impacts of this kind of targeting are disappointing. GDP would not reach its reference account level for ten years. At this horizon, the 43,000 supplementary jobs created would only result from a decrease in labour productivity, most employment being created in sectors in which labour productivity is lower than the general average in the economy.

These two sectoral targets are in any case not feasible in practice since they would be assimilated to sectoral state aid. We should therefore examine the effectiveness of targeting specific wage brackets, a move that, given the sectoral differences in the distribution of the payroll, leads to a certain focusing of reductions. Two forms of targeting are carried out: one on low salaries (less than 1.6 times the minimum wage) and one on median wage brackets (between 1.6 and 3.5 times the minimum wage), for which we know that salary densities are higher in industrial sectors open to international competition.

We expect targeting of low pay to have a positive impact on employment, and targeting of intermediate pay to boost competitiveness. Yet, both scenarios produce equal amounts of jobs: around 75,000 additional jobs after ten years. The advantage of targeting low pay in terms of jobs created is only valid in the short term. Rapidly, the additional jobs in relation to the reference account become similar in both scenarios. However, these jobs are not created in the same sectors. Targeting median salaries rather than low salaries creates 8,000 more jobs in industry, 4,000 in services to business, 4,000 in mixed services, and 1,000 in the transport sector. However, it creates 9,000 fewer jobs in retail, 8,000 in the hotel and restaurant industry and 3,000 in the building sector.

In addition, targeting intermediate salaries is a lot more beneficial to competitiveness and growth. After ten years, GDP goes up by 0.26 points in comparison with its reference level, compared to 0.16 points when low salaries are targeted. The external balance contributes about 40% of this difference. The real cost of labour per unit produced tends to go down when median salaries are targeted, which indicates that the measure has longer-lasting positive impacts.

The volume of jobs created, a decisive criterion for those who champion reducing the labour cost on low salaries, should therefore be weighed up against another essential parameter, i.e. the impact of the sectoral composition or structure of jobs. Targeting low pay automatically boosts sectors that have little exposure to international competition and that are slightly less productive than average in the economy. The objective of employment thus overrides that of competitiveness. Yet in the long term, improving competitiveness can create additional, quality jobs, whereas the opposite is not true: creating low-qualified jobs in non-tradable sectors has little impact on competitiveness. Targeting that boosts industrial, exporting sectors seems more
appropriate for the French economic situation, which is characterized by declining competitiveness and low growth.

 

 

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