How Do Fiscal and Labor Policies in France Affect Inequality?

Raphael Espinoza and Esther Perez Ruiz

No 2016/041, IMF Working Papers from International Monetary Fund

Abstract: This paper explores the impact of fiscal and labor market policies on efficiency, inequality, and fiscal outcomes in France. We extend the general equilibrium model calibrated for France by Alla and others (2015), with measures of labor and capital income for different groups in the economy (the unemployed, unskilled workers, skilled workers, public servants). For each of these groups we combine data on the income distribution with the outcomes of policy simulations to assess the impact of a suite of stylized policies on output, the fiscal balance, the Gini coefficient, and the shape of the Lorenz curve. We find that most types of fiscal expansions, while adding to the deficit and debt in the near term, generally reduce inequality, the main exception being capital income tax cuts. A reduction of the minimum wage has an ambiguous impact on the income distribution: the Gini coefficient increases, but the lowest income quintile improves its relative position in the income distribution thanks to positive employment effects. The paper also finds scope for “win-win” policy packages that could improve overall efficiency, inequality, and fiscal outcomes, for instance if targeted labor tax reductions are offset by cuts in the public wage bill.

Keywords: WP; wage; public goods; rate of return; redistribution; market income inequality; labor market policies; fiscal policies; differential wage elasticity; wedge cut; wage bill; reservation wage; differential wage elasticities to unemployment; wage curve; compress wage dispersion; wage response; elasticity to employment; unskilled wage; Wages; Income inequality; Income distribution; Labor taxes; Minimum wages; Europe (search for similar items in EconPapers)
Pages: 44
Date: 2016-02-28
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Citations: View citations in EconPapers (1)

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