Labor Tax Cuts and Employment: A General Equilibrium Approach for France

Raphael Espinoza and Esther Perez Ruiz

No 2014/114, IMF Working Papers from International Monetary Fund

Abstract: The paper presents a simple supply side, general equilibrium model to estimate the macroeconomic effects of labor tax cuts. The model assumes that output is produced using capital, unskilled and skilled workers, and public servants. Wage formation for skilled workers features a Blanchflower-Oswald wage curve, while the labor supply for unskilled workers is very elastic around the minimum wage for small changes in employment. The model is calibrated for France and used to estimate the output and employment effects induced by two recent tax reforms: the Crédit d’Impôt pour la Compétitivité et l’Emploi (CICE) and the Pacte de Solidarité Responsabilité (RSP). We find that the tax cuts, if not offset by other fiscal measures, would contribute overall to creating around 200,000 jobs in the short run (600,000 jobs in the long run). Since the model abstracts from demand side effects, the results should be interpreted as providing estimates of the effect of tax measures on potential output and potential employment.

Keywords: WP; wage; labor cost; rate of return; social security contributions; minimum wage; Responsibility Pact; pacte de responsabilité; crédit d’impôt pour la compétitivité et l’emploi; CICE; employment outcome; wage curve; spending cut; differential wage elasticity; labor income; wage distribution; differential wage elasticities to unemployment; labor cost reductions; supply curve; labor tax wedge; labor demand function; Employment; Wages; Labor costs; Public employment; Labor taxes (search for similar items in EconPapers)
Pages: 37
Date: 2014-07-01
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Citations: View citations in EconPapers (3)

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