Low skilled Jobs The French Strategy N 2007 15 July 2007 Henri STERDYNIAK OFCE 1 Low skilled Jobs The French Strategy Henri Sterdyniak OFCE1 Abstract Since 1995 French governments implemented a specific strategy aiming at lowering unemployment or inactivity of so called unskilled workers in fact of low wage workers This strategy used two tools cuts in employers social contributions reduce companies costs for hiring low wage workers the Prime Pour l Emploi PPE raises low wage workers incomes and increases the gap between wage and assistance benefits in order to increase incentives for low wage workers to take a job The paper provides a description of the situation of unskilled workers in France It describes the history of measures lowering employers contributions on low wages presents and discusses the studies that have tried to assess the impact of such measures on employment These cuts cost approximately 18 billion euros in 2007 An average estimate of about 550 000 jobs created would have an ex post cost of 9 billion euro i e 176 000 euros per created job The history and the structure of the PPE are presented According to existing studies the PPE would not have a significant effect on labour supply Should it be concluded from it that there is not inactivity trap Or on the contrary that the trap is very deep The current debate on the appropriateness to maintain employers contribution and PPE or to reform them is addressed Keywords Employment Policy Wages Taxation JEL Classification J23 J32 E62 1 OFCE 69 Quai d Orsay 75007 Paris E mail sterdyniak ofce sciences po fr This paper was presented at the 4th Euroframe Conference on Economic Policy Issues in the European Union Bologne 8 June 2007 I thank the participants for their comments 1 Low skilled Jobs The French Strategy 1 Introduction Even if it is the sixth country in the world in terms of GDP France seems unable to tackle mass unemployment The French unemployment rate rose from 2 8 to 10 from 1974 to 1986 and declined below 9 only 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 They have consisted in demand impulse to raise GDP growth like in 1981 wage moderation called in France competitive disinflation public employment policies subsidies in the market sector for some workers categories the young the long term unemployed measures to reduce labour supply early retirement allowance for non workingmothers 35 hour working week reforms of unemployment benefits reforms of labour law like the CNE Contrat Nouvelle Embauche The French governments also implemented a specific strategy aiming at lowering unemployment or inactivity of so called unskilled workers in fact of low wage workers This strategy used two tools 1 Cuts in employers social contributions reduce companies costs for hiring low wage workers 2 The Prime Pour l Emploi PPE working tax credit raises low wage workers incomes and increases the gap between wage and assistance benefits in order to increase incentives for low wage workers to take a job As the government controls minimum wages SMIC and minimum income RMI it may use four instruments for three objectives reducing the unskilled workers wage bill for companies ensuring a purchasing power for unskilled workers ensuring a purchasing power for people without job Nevertheless this strategy suffers from some contradictions Social contributions cuts are costly in terms of public finances and weaken the funding of the Social Security System Companies have an incentive to create specific jobs paid at the SMIC level i e low wage jobs with no prospect in terms of individual careers These jobs bring downwards medium wages Part time jobs financial incentives both for companies and workers lead to an increase in the number of part time jobs and hence of poor workers Maintaining a significant gap between labour income and assistance benefits puts a downward pressure on the latter 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 ones effects of microeconomic substitution the measure allows the development of low wage firms at the expense of the other firms and macroeconomic substitution if the measure is financed by a rise in another tax 2 Henri Sterdyniak Section 2 provides a description of the situation of unskilled workers in France and of the reasons behind the specific strategy in favour of unskilled work Section 3 describes the history of measures lowering employers contributions on low wages presents and discusses the studies that have tried to assess the impact of such measures on employment The current debate on the appropriateness to maintain existing measures or to reform them is addressed Section 4 does the same job for PPE 2 The case for an unskilled workers employment strategy The analyses and debates on the strategy of social security contributions cuts on low wage employees mix three different concepts Low wage workers Initially workers paid at the SMIC level were concerned Then in order to avoid low wage traps contributions cuts were extended to employees paid up to 1 3 then 1 6 times the SMIC It is the concept effectively used Non graduate workers but they can take relatively skilled or well paid jobs because of their experience or some specific qualities Conversely some graduate workers may be obliged to accept unskilled or low wage jobs Unskilled jobs Their definition varies according to studies INSEE definition retains farm workers unskilled industrial workers watchman services to households employees and employees in the retail trade sector see Chardon 2001 Most French economists have advocated a specific strategy for unskilled low wage workers employment2 for five reasons 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 level of the minimum wage prevents their wages from falling sufficiently On the contrary skilled employees are close to
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