Thursday, November 01, 2007

The Real Cost of the French Social System

My last post inspired me to do some research. I was curious to see exactly how much tax the French minimum wage employee pays, on average, and how much the employer has to set aside from his revenue to employ one person at the cheapest possible rate.

I found that the situation is worse than I thought. I had written that the employee and the employer paid each about $400 in taxes, out of a total employee gross salary of $1,856. I was wrong. The employee pays around $400, but the employer pays $730, that is to say between them, they pay $1,132.45, out of a total gross salary of $1,856.

This sounds impossible; but remember that the employer pays over and above the gross salary amount declared to the employee. Therefore, the employer must set aside $2,589.70 in order to give the employee $1,458. The total taxes paid to the government represent 44% of this total sum set aside, and the employee gets only 56%.

Here is a list of the charges that the employee and employer must pay, in different proportions:

Health Insurance
Old Age Insurance
Family Pension (all families get a sum per child, only paid by employer)
Workman's Comp (only the employer pays)
Solidarity Contribution (kind of a general tax to help pay back the social services deficit; only employer pays)
Housing Assistance (FNAL, employer pays)
Unemployment
Cessation of Activity Insurance (AGS, employer pays to insure payment of an indemnity to employees forced out of work)
Supplemental Old Age Insurance
Another Supplemental Old Age Insurance (AGFF)
General Social Contribution (CSG, another general social services tax, paid only by the employee)

(Source.)

This does not include personal income taxes, which for a minimum wage employee would be minimal.

On the other side of the equation, you must keep in mind that this employee receives medical care at extremely reasonable prices (e.g. $20 per visit, no charge for hospitalization), retirement benefits at about age 65 (some government employees get it sooner), unemployment benefits that are extremely generous--or a pension if the person cannot find work after a year or so (the RMI), disability compensation, housing allowance according to family situation and salary considerations, a pension for each of up to three children until they reach 18, a pension for unwed mothers (and there are many unmarried couples, given this incentive), free state education including university (room and board not included), a workweek presently limited to 35 hours plus occasional overtime, five weeks required vacation (even if they are on unemployment), state-paid job training and reorientation assistance, a guaranteed job contract that prevents the employer from letting the employee go without generous compensation, and other benefits that I forget.

This all sounds great for the employee, doesn't it? The only problem is that the reality of work conditions (sometimes very tough), the level of taxes, the employer limitations, the very competitive black market, plus the cost of this huge government structure where 25 percent of the citizenry are employed, create for job competition where there are 100 applicants for every single offer, if not many more. Unemployment continues to bobble above 8%. The French economy is struggling. It's a wonder they're still a viable nation.

chomage
[Thanks to gftforex.com for the chart comparing US and French unemployment figures. Click on it for a larger version.]

And I haven't even mentioned the monopolistic strength of the five official French unions, the other taxes like the 70 percent gas tax and the 19.6 percent sales tax on everything, the penalizing taxes upon the wealthy that chase them from the country, the proportionately more heavy taxation of those earning more than the minimum wage, the dangers of trying to outwit the government inspectors while milking the system, and the social unrest that these collective pressures create. It is perhaps this last that is the most precarious.

There are reforms in the air; but watch your calendars for mid-November. There are also reactionary strikes in the works that should make for good television. It's not easy to take candy this good from such strong babies.

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19 Comments:

Anonymous Zuckerman said...

I just found your blog and immediately identified with your tagline "Proving that economics and a sense of humor are not mutually exclusive."
One of the strangest (economically speaking) pratices in France is the competitive exam for recruiting teachers. I don't know whether you have already looked into this topic, but it is rich in ironies and contradictions.
Each year, more than 100,000 aspiring teachers invest millions of hours to prepare for the CAPES or the agrégation. 90% fail and the other 10% have learned how to pass a competitive exam but not how to teach.
I explored the system for selecting English teachers in my book "Sorbonne Confidential" (which I hope qualifies as a combination of humor and economics).
I thank you in advance for any insights you might have into the economics of the concours.

Best Regards,

Laurel Zuckerman
author of "Sorbonne Confidential"

1:58 AM  
Anonymous Ami said...

Hmm. I do actually think there does need to be some reform in France. The public sector unions are a disaster, for example. But you seem to latch on to some strange data for your examples.

Unemployment stats are not measured the same way across countries, and even if they were, things like unemployment benefits make people report their employment status differently. The 25-54 (prime working age) labour force participation rate in France is almost identical to the U.S. (although I couldn't find really recent figures, there's no reason to think that's changed in the last few years). So obviously the taxes don't quite have the effect you think.

There are other issues that those stats do make clear though. In particular, French people tend to retire a lot earlier. Not something that's sustainable as the population ages. But it's not like the French are living in poverty either.

4:07 AM  
Blogger Katy said...

Hello commentators,

I welcome both of you.

Ami's point about unemployment among the 25-54 age group spurred me to do a little research. The actual situation is quite different in France from the US. Please see the chart at this link.

According to this source, unemployment in France within this age group is 8.5 percent. In the US it is 4.6 percent.

Please keep your comments coming. I love a dialogue.

10:16 AM  
Anonymous Ami said...

Hi Katy,

As I said in my comment, unemployment stats between countries aren't comparable. They are collected differently, and the different social programs provide different incentives for reporting yourself as unemployed/employed, regardless of your actual status.

The OECD Employment Outlook 2007 - Statistical Annex, table C, gives the following employment statistics for 2006:

France 15-24: 25.3%
France 25-54: 80.0%
France 55-64: 40.5%

U.S.: 15-24: 54.2%
U.S.: 25-54: 79.8%
U.S.: 55-64: 61.8%

My point with this isn't to say that France doesn't have problems. But there's no reason to think that the problem is taxes.

The low employment rate among 55-64 year-olds is a lifestyle choice that is probably unsustainable in light of changing demographics.

The problem with youth unemployment is also real, although I suspect it's not as bad as these figures suggest either. France has almost-free university education, so many young people might actually be making the right choice to stay out of the labour force longer (I don't know this for sure, but it's worth investigating before drawing too many conclusions).

The U.S. also has problems. Whether you prefer the problems of France over the problems of the U.S. is largely a matter of culture and what you're used to.

... Ami.

4:06 AM  
Blogger Katy said...

Hi Ami,

I agree with you that the US also has problems, and that, as you say, "Whether you prefer the problems of France over the problems of the U.S. is largely a matter of culture and what you're used to."

No argument from me about that.

And we surely can agree to disagree about the unemployment situation. I do just want to point out, though, that your stats (France 25-54: 80.0%, and US 25-54: 79.8%) are not the unemployment statistics, but the "taux d'emploi", which is probably what we call in English the "participation rate".

Because 80.0% and 79.8% are statistically almost identical, perhaps we can agree that in the US and in France, about the same proportion of the public either works, or wishes to work.

However, when it comes to "chomage" (the "unemployment rate"), the differences are much more salient. I think you will agree that, by anyone's measure i.e. no matter whose stats you prefer, France has undeniably something like twice as much "chomage" as the US.

Obviously, I am going by only two things: the statistics that the French and US governments publish (and remember, they both have incentive to keep those figures as low as possible), and my own experience having lived and worked in France and the US, and having relatives who now live and work in both places. The employment climate in France is nowhere near as fluid as in the US, which tends to corroborate the actual statistical variance.

However, I love the French and France; and I agree that we all have the freedom to prefer one political system over the other. If you have read some of my posts, you can see where my economic and political ideals lie. The truth of the matter is that neither France nor the US lives up to them. As I get older, I find I cannot remain silent any longer as both countries struggle with these issues.

Thanks for your input.

10:23 AM  
Anonymous Ami said...

Hi Katy,

Actually the figures I quoted are the employment ratio, not the labour force participation rate.

You can check the chart yourself, but I'll quote the full figures here for completeness:

France, 15-24
=============
Unemployment: 23.9%
Labour Force Participation: 33.2%
Employment/Population Ratio: 25.3%

France, 25-54
=============
Unemployment: 8.6%
Labour Force Participation: 87.4%
Employment/Population Ratio: 80.0%

France, 55-64
=============
Unemployment: 7.2%
Labour Force Participation: 43.6%
Employment/Population Ratio: 40.5%

United States, 15-24
====================
Unemployment: 10.5%
Labour Force Participation: 60.6%
Employment/Population Ratio: 54.2%

United States, 25-54
====================
Unemployment: 3.8%
Labour Force Participation: 82.9%
Employment/Population Ratio: 79.8%

United States, 55-64
====================
Unemployment: 3.0%
Labour Force Participation: 63.7%
Employment/Population Ratio: 61.8%

I'm claiming that the employment and labour force participation rates cannot be compared directly between countries. The employment/population ratio, however, is objective, so you can compare them directly.

| I think you will agree that,
| by anyone's measure i.e. no matter
| whose stats you prefer, France has
| undeniably something like twice as
| much "chomage" as the US.

Nope, based on the above statistics, I don't agree, at least not overall.

| Obviously, I am going by only two
| things: the statistics that the French
| and US governments publish (and
| remember, they both have incentive to
| keep those figures as low as
| possible),

I'm not claiming that either country is cooking the books. Just that it's difficult to get comparable figures across very different social systems.

| and my own experience having lived and
| worked in France and the US, and
| having relatives who now live and work
| in both places. The employment climate
| in France is nowhere near as fluid as
| in the US, which tends to corroborate
| the actual statistical variance.

I can't really speak to your perceptions. It may be that you're unconsciously giving a lot of weight to youth unemployment, which is certainly a problem in France.

I've also lived in France, and you do notice a lot of protests there. That might also colour your perceptions, although I would attribute that more to cultural differences.

... Ami.

11:34 AM  
Blogger Katy said...

Hi Ami,

I don't see why you accept the employment ratio figures for both countries, but not the unemployment figures. It would seem you either have to accept them all, or none, if you want to be consistent.

Furthermore, by your own statistics, unemployment in France of the 25-54 age group is 8.6%. In the US, according to the BIS, it is even lower than I thought, i.e. 3.8%. (Source.)

Okay, you can bicker about whether or not these figures are valid, and whether or not they can be compared between countries. Personally, I prefer to accept them at face value. You, of course, have every right to refuse to do so; that's okay by me.

Thanks for your input.

12:02 PM  
Anonymous Ami said...

Hi Katy,

The unemployment and labour force participation figures are gathered using household surveys. So somebody calls around and asks who is employed.

Household surveys are affected by 1) actual differences in methodology, such as whether or not somebody who waits for a job offer but doesn't actually submit job applications is considered unemployed, and 2) perceptions of the people themselves. The perceptions are going to depend a lot on the social system. When your government gives you unemployment insurance payments, then you're more likely to consider yourself unemployed than when you're not.

The employment ratio, on the other hand, is much less subjective. There are no surveys involved as it's based on tax data.

But... lets forget that and assume for the sake of argument that all the figures are in fact comparable...

...that still leaves us with 80% of 25-54 year-olds employed in France vs. 79.8% in the U.S. This is inconsistent with the notion that high taxes hurt employment in France (which was your original point).

... Ami.

12:37 PM  
Anonymous Ami said...

And just to be clear once again, the 80% vs. 79.8% is not the labour force participation rate, as you thought earlier. That's the employment rate:

(the number of people employed)/(the population size).

12:41 PM  
Blogger Katy said...

Hi Ami,

But wait. I've just found your own OECD statistics on the employment rate. They are here.

It says:

Employment rate 25-54 age group in 2005:

France 62.3%

USA: 72.5%

Where did you get your 80% and 79.8% figures? Even when I click on the link you yourself gave, I come up with my figures.

Here is your link again:

your link

1:26 PM  
Blogger Katy said...

Wait Ami,

I found your figures. How do you explain that the OECD has published both your and my figures? Let me give you a more precise link to mine:

Click on this page .

Click on "How does France compare" and download document 38797496.pdf. Therein, you will find OECD figures as I cited.

Strange.

1:34 PM  
Blogger Katy said...

Ami,

No, I mean document 38335554.pdf.

This is the one with the figures I cited.

1:39 PM  
Anonymous Ami said...

The relevant line from the PDF you link is:
| Still, only 62% of people of working age
| have a job, compared with over 70% in
| the best-performing OECD countries

"Working age" is 15-64. I'm focusing on 25-54 (considered the "prime working years"). So the figures are consistent with each other.

I'm not disputing that overall employment is higher in the U.S. But if this was due to taxes then I would expect this to be true of the 25-54 age group as well, not just the young and old.

... Ami.

1:44 PM  
Blogger Katy said...

On the contrary, I find it quite normal that the 25-54 age group is the least affected. I suspect the reason why it affects the young and old more than the middle group is that these are the weakest competitors in an employment system, the first to be excluded in a very competitive job market.

You will also find that French immigrants, even 25-54, are highly affected by unemployment. They too are in that weaker portion of the population, along with the young and the old.

While we're on the subject of data quirks, you might keep in mind that a number of French working-age people have chosen to leave the country to work in more green pastures like Ireland, the US and England. That will also affect your 25-54 figures, raising the employment rate for that age group.

While you were writing, I was studying your OECD statistics. I now realize something you obviously knew all along, i.e. that my figures were general ones, and yours referred only to the 25-54 age group. Sneaky you. (Your latest comment confirms this, I see.) I see no reason to change my focus, however.

I'm glad you don't dispute that overall employment is higher in the US.

Thanks for the great discussion.

2:16 PM  
Anonymous Ami said...

I wasn't trying to be sneaky - I pointed out the age group I was looking at in my first post and repeatedly afterwards.

I also gave other plausible explanations why the employment ratios might be higher for the old and the young, aside from taxation.

Net migration in France is actually positive - more people immigrate than emigrate. But the effect of migration on the statistics is ambiguous in any case. It would take a lot of digging and probably even then you wouldn't know for sure if migration had any effect at all on employment levels.

It's plausible that young workers might be more affected by a tight labour market, but it's not plausible that the bulk of workers would be completely unaffected.

If you combine this with other data then the link between tax rates and employment looks even less plausible. The graph in the "How France Compares" PDF, for example, lists all the OECD countries. The U.S., which I think has one of the lowest tax rates, is 11th out of 31 in percentage employed.

Sweden has possibly the highest taxes in the world, but does better than the U.S. Canada is notable because of the cultural similarity to the U.S., but it has higher taxes and also a higher employment ratio.

... Ami.

12:08 AM  
Blogger Katy said...

Okay, Ami. I was just joking about your being sneaky. Of course I should have picked up on that earlier.

We can exchange our personal opinions on "plausible explanations" until the cows come home, I guess.

Please keep in touch, and we'll do this again some day.

9:28 AM  
Anonymous Anonymous said...

[ "Therefore, the employer must set aside $2,589.70 in order to give the employee $1,458. The total taxes paid to the government represent 44% of this total sum set aside, and the employee gets only 56%." ]

_______

ALL those taxes are paid by the 'employee'... NONE are paid by the employer.

The employee effectively pays a 44% tax, but he is deceived into believing that he pays a lesser tax... the employer is merely serving as a taxman for the government -- diverting a large part of wages directly to the government, unseen by the employee earning them.

Social Security in the U.S. works the same way; the government constantly pushes the myth that American employers pay half of the Social Security payroll taxes for their employees.

The EMPLOYEES pay it all -- they just don't realize it.

2:55 PM  
Anonymous Anonymous said...

I didn't understand everything, sorry but my mother tongue insn't English. Guess what...
You are thinking on something organized for the society but using individual values (the employer pays, the employee pays..)
I believe, it will be better to think on this subject using social values.
The health system in US costs 16% of the production and covers 80% of the population
The health system in France costs 11% of the production and and covers 99,9% of the population (I don't know where is the 0,01%..)

The wealth world organization (depending of UNO) says that the french population has the best system compared to 190 other countries°
This is just what I ask, have the best service for the lower price.

PS: you forgot an other point very important a french worker as a productivity 30% higher than an american.
And other points : like every workers I have 5 weeks hollidays + 9 days because I work 39 h/week and not 35.

1:07 AM  
Blogger Katy said...

Yes, the U.S. system is more expensive. The reasons: We do not have a free market health system. We need to open the insurance market across state lines to open competition, privatize Medicaid/Medicare, and shift the cost from employer to employee with free choice an the use of Health Savings Accounts to pay for ordinary "maintenance" medical visits.

Second: Medicare distorts prices terribly by overpaying and paying for the number of interventions, thus encouraging excess.

Third: We Americans are financing all the pharmacological research for the rest of the price-controlled world.

Fourth: Our system rewards employers' lack of discernment on choosing an insurance provider through tax favors.

Fifth: We do not allow the market to adjust prices, i.e. customers never see the bills.

Sixth: We are a litigious society, and malpractice lawsuits are hugely expensive. On the other hand, when a doctor screws up, you're glad to get the millions, instead of the paltry E.20,000 you might get in France from the government when a doctor makes a mistake.

French productivity is extremely high. The reason is because you have a labor market that is extremely distorted. There are hundreds of applicants for most jobs, i.e. the competitive market is skewed towards the employer. Second: The shortened work-week means people have to be more efficient, just as when unemployment rises in any country, productivity always rises. These are just microeconomic rules-of-thumb.

Another thing: French health care is now much more free market than the system in the U.S. You have co-pays now, and you have out-of-pocket expenses for some medications. It's funny, while the U.S. is trying to go social, France is going more free-market. They should consult each other.

6:02 AM  

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