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The labour market and fiscal impact of labour reductions: the case of reduction of employers' social security contributions under a wage norm regime with automatic price indexing of wages

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  • Koen Burggraeve

    (National Bank of Belgium, Research Department)

  • Philip Du Caju

    (National Bank of Belgium, Research Department)

Abstract

This paper investigates the possible labour market and fiscal impacts of labour tax reductions in a typically Belgian setting, i.e. a wage norm regime with automatic price indexing of wages. We consider reductions in employers' social security contributions and fiscal compensation through value added or production taxes. Reductions in employers' social security contributions can only have significant employment effects if they effectively reduce labour costs. These reductions are only partly self-financing, and the cost per job created is high. The remaining negative impact on the government budget should be compensated through an alternative means of financing this expenditure, since not\u2013compensating for the budgetary loss is not a realistic option in the long run. For this purpose, various financing schemes can be envisaged, but an increase in value added tax and the introduction of a tax on production (mimicking environmental taxes affecting firms' production costs) are the two possibilities considered in this paper. The alternative financing mechanisms destroy some of the positive employment effects of the initial reductions. However, on balance the combined measures can create some employment without worsening the government budget balance. The reaction of wages to the reduction in employers' social security contributions and to the fiscal compensation measures proves crucial. The more the initial reductions in employers' contributions are used to finance higher gross wages, and the more the inflationary effects of fiscal compensation measures are passed on in wages, the less positive the impact on employment will be. This means that little job creation is to be expected without a special co-ordination effort between all labour market players. Labour tax reductions are by no means a substitute for other labour market reforms.

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  • Koen Burggraeve & Philip Du Caju, 2003. "The labour market and fiscal impact of labour reductions: the case of reduction of employers' social security contributions under a wage norm regime with automatic price indexing of wages," Working Paper Research 36, National Bank of Belgium.
    • Handle: RePEc:nbb:reswpp:200303-1
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    Cited by:

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    2. François Rycx & Yves Saks & Ilan Tojerow, 2015. "Does Education Raise Productivity and Wages Equally? The Moderating Roles of Age, Gender and Industry," Working Paper Research 281, National Bank of Belgium.
    3. Geert Langenus, 2006. "Fiscal sustainability indicators and policy design in the face of ageing," Working Paper Research 102, National Bank of Belgium.

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    More about this item

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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