An Assessment of the 'Crédit d'Impôt pour la Compétitivité et l'Emploi' and the 'Pacte de Responsabilité et Solidarité'

A broad-based deterioration in competitiveness led French exports to lose a considerable part of their market share between 2003 and 2013. High and increasing labour costs weighed on the profitability of firms, which in turn hampered their ability to invest and innovate. It is against this background that two flagship measures were adopted in France, the crédit d'impôt pour la compétitivité et l'emploi (CICE) and the pacte de responsabilité et solidarité (PRS). Their aim is to create employment and improve competitiveness by reducing the cost of labour by EUR 30 billion (1.5 % of GDP) by 2018. In this Economic Brief we assess the effects of the CICE and the reduction in social security contributions contained in the PRS using the European Commission's QUEST III model. The results of our simulations suggest that, if financed ex-ante, the CICE and the social security exemptions of the PRS could deliver up to 150 000 additional jobs and would have a moderate positive impact on GDP over five years. At horizon 2030, the reforms would increase employment approximately by 380 000 jobs and add 1% to GDP. Furthermore, the measures improve the profitability of firms and the external balance. They were a first step towards restoring the competitiveness of France. Relaxing the assumption of ex ante financing of the reform leads to stronger GDP effects and up to 180 000 additional jobs, but also entails a rise in debt levels. With the recently approved labour market reforms, the impact of the CICE and PRS would be stronger. In a final scenario, we mimic a better performing labour market by using a higher labour supply elasticity. This would increase the number of jobs created by the labour cost reductions to 260 000 over five years.