Revisiting the « Making Work Pay » Issue : Static vs Dynamic Inactivity Trap on the Labor Market

Theoretical and applied studies on gains for returning to employment and the economic policy recommendations they suggest in setting up social benefits, essentially derive from a static approach. We propose a dynamic evaluation of these benefits, taking into account the inter-temporal nature of the calculus made by unemployed workers and the impact of the return to employment on future employment perspectives. In this dynamic framework, which includes workers’ mobility between jobs, we show that a low monetary gain upon return to employment is neither a necessary nor a sufficient condition to explain the existence of a low level of labor force participation originated in incentive problems. The Economic policy recommendations are thus modified ; in order “to make work pay”, it is more than a matter of reforming social programs: priority must also be given to ascending professional mobility through policies supporting growth and active policies on the labor market. Temporary assistance for returning to employment can be just as efficient as permanent mechanisms inspired by income tax reduction devices, as well as less costly for public finances.