Payroll Tax Reductions on Low Wages and Minimum Wage in France

Introduced in France in the 1990s to reduce the cost of low-skilled labor, payroll tax reductions on low wages were later expanded and extended to higher wages. This study evaluates the impact of the current payroll tax schedule on employment, fiscal surplus, and welfare. We develop a life-cycle matching model in which workers are heterogeneous in terms of age, education, human capital, family status, hours worked and idiosyncratic productivity, and where search effort, hiring and separations are endogenous. Accounting for interactions with the socio-fiscal system, we demonstrate that reducing payroll tax cuts for low wages would result in declines in both employment and fiscal surplus. Furthermore, we show that increasing the minimum wage would significantly reduce employment and fiscal surplus, with the magnitude of the effect depending on whether the payroll tax schedule and other socio-fiscal measures are indexed to the minimum wage. Lastly, we identify the optimal payroll tax schedule, revealing that employment, fiscal surplus, and welfare can all be improved by increasing payroll tax reductions for wages near the minimum wage while reducing them for wages exceeding twice the minimum wage.