Often cited as one of the causes explaining the persistence of a high unemployment rate in France, low wages have been able to benefit from a reduction in social security contributions. But concretely, what benefits does the reduction of social security contributions provide for companies?
Social security contribution relief, in what form?
These contribution reliefs mainly consist of a reduction in employer social security contributions on low wages. All of this is intended to lower the cost for companies. The objective assigned to these policies is therefore to reduce labor costs, and thus promote low-skilled employment, whose share of total employment was showing a downward trend.
These policies are originally underpinned by two observations:
- A small gap between the average wage and the SMIC (minimum wage), which hinders access to employment for the least qualified and thus encourages the maintenance of high unemployment,
- High labor costs, due in part to the financing of social protection based, according to Bismarckian logic, on social security contributions.
Expected benefits of social security contribution reduction schemes
The reduction in labor costs
The decrease in social security contributions corresponds, by nature, to a reduction in labor costs for companies. It therefore results in a decrease in the ratio between the cost of labor and the cost of capital, the latter remaining unchanged. Consequently, companies are less inclined to replace people with machines, which economists refer to as less “capital-labor substitution.”
As a result, the number of employees increases. It also corresponds to a reduction in production costs for companies: either this is passed on in selling prices and demand for the products of French companies increases, which promotes employment, or companies increase their margins, their profitability increases and they consequently have more means and incentives to invest.
The increase in investment allows for the expansion of production capacities and therefore also has a positive impact on employment. If unemployment is low, the reduction in employer contributions can also lead to an increase in gross wages. In this case, there is no effect on employment.
Specific effects on low wages
Increased job creation: empirical economic analyses show that capital-labor substitution is more sensitive to the ratio of labor and capital prices when it concerns unskilled labor.
Relief targeted at low wages therefore has a more favorable impact on employment, as it is less likely to result in an increase in gross wages than a reduction in contributions on higher wages (where the unemployment rate is significantly lower than that of the unskilled), and the rates of SMIC increases are, for their part, controlled by public authorities.
Finally, the number of jobs created per Euro spent on contribution relief is mechanically higher if these are targeted at low wages: a relief of €1,000, for example, represents a reduction in labor costs, as a percentage of that cost, ten times greater for a worker on the SMIC than for a senior executive whose remuneration would be ten times higher.
A solution to reduce unemployment among low-skilled individuals
In all developed countries, the demand for unskilled jobs that can be automated and/or outsourced by companies tends to decrease under the effects of technical progress and competition from emerging or developing countries.
In many countries, the adjustment between labor supply and demand has been achieved through a reduction in gross wages for unskilled workers, which has offset the loss of automatable and/or outsourcable unskilled jobs with the creation of jobs in low-skilled but non-automatable and non-outsourcable services (e.g., construction, nursing assistants, home care).
This reduction in wages has sometimes led to an increase in “working poor“. In these countries, either there is no national minimum wage, or it has been set at a low level. France has chosen to set the minimum wage at the highest level in Europe (along with Slovenia) relative to the average or median wage, to limit the number of working poor, and to reduce the rate of social security contributions at the SMIC level, to limit the cost of the SMIC for companies.
These contribution reliefs therefore form part of a policy of solidarity towards the least qualified individuals, who are the most affected by international competition and technical progress. In particular, they allow them to find positions in the service sector where job potential is very high, provided that labor costs are not a barrier to hiring.
Minimum wage as a percentage of the median wage in 2022
| France | Germany | United Kingdom | Italy | Spain | Netherlands | Belgium |
| 61 | 53 | 58 | N/A | 50 | 46 | 41 |
N/A: not applicable (countries where there is no national minimum wage)
Althéa to support you
We have observed the numerous impacts of this new regulation on companies. This is why we believe it is necessary for companies to be supported by a consulting firm, primarily for the optimization of social security and employer contributions.
This makes sense, as Althéa has an offering concerning the optimization of social security and employer contributions. Indeed, we provide you with our technical expertise and constant legal monitoring to help you control your social security contributions and maximize your savings.
Althéa is a management consulting firm that brings together more than 250 consultants with triple expertise: consulting methodology, IT solutions, and business processes.
In 2023, we achieved €28 million in turnover. We support our clients in their transformation projects in the areas of HR, Finance, Procurement, and Supply Chain, from the construction of the transformation trajectory to the operational deployment of projects.
