Payroll tax reduction and wage dynamic

This article assesses the impact of the first payroll tax reductions implemented in France in the 90s on the wage dynamics of low-income employees. Since these policies represent a net transfer from the State to the employer/employee match, they are unlikely to lead to wage reductions for employees of a given productivity level. However, the degressivity of such payroll tax reductions leads to a concave link between wage and productivity such that for given productivity changes, wage increases are lower once the payroll tax reductions are implemented. The purpose of this study is to test the validity of this low-wage trap hypothesis. Our first empirical strategy simply consists in comparing the evolution of wage increases for employees benefiting from the payroll tax reductions with those of the closest individuals in terms of wages, but not affected by these reductions. This difference-in-difference strategy shows that low-wage employees were more likely than “medium-wage”employees to get a raise in 1997 than they were in 1994, when payroll tax reductions were only marginal. The substantial minimum wage increase in the period makes it hard, though, to interpret these results causally. Our second empirical strategy compares the individual wage evolutions of a near-to-minimum wage employee between 1994 and 1998 with that of a similar individual but for the 1984-1988 period. We observe no significant differential evolutions. Overall, our results suggest that payroll tax reductions did not decrease the expected income of low-wage employees, at least in the short or medium run.