By Guillaume Allègre

In a forthcoming article in the Journal of Economic Perspectives[1], Harvard Professor and bestselling textbook author Greg Mankiw defends the income earned by the richest 1% and denounces the idea of taxing them at a marginal rate of 75%. For Mankiw, people should receive compensation in proportion to their contributions. If the economy were described by a classical competitive equilibrium, then every individual would earn the value of his or her own marginal productivity, and it would be neither necessary nor desirable for the government to redistribute income. The government would limit itself to correcting market distortions (externalities, rent-seeking).

In a OFCE’s Note (no. 4, 19 July 2013), we show that the economy in which the 1% live is very different from a classic competitive equilibrium in ways that Mankiw does not discuss, which seems to us to be a significant limitation in his argument. It is because the 1% do not live in a world of perfect competition that they are able to secure astronomical incomes. The incomes received on the market by the 1% do not therefore correspond to their marginal social contribution. This does not mean that their social contribution is null, but rather that the market is unable to measure this contribution. These astronomical incomes cannot therefore be defended on the basis of “merit measured by marginal contribution”, as proposed by Mankiw.

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See the following OFCE blogs on the same subject: “Superstars and equity: Let the sky fall” and “Pigeons: how to tax capital gains”.

By Céline Antonin and Sandrine Levasseur

On 1 July 2013, ten years after filing its application to join the European Union, Croatia will officially become the 28th member state of the EU and the second member country from former Yugoslavia. Given the country’s size (0.33% of the GDP of the EU-28) and the political consensus on its membership, Croatia’s accession should pass relatively unnoticed. However, there are challenges posed by its entry. Indeed, at a time when the European Union is going through the worst crisis in its history, legitimate questions can be raised about whether Croatia is joining prematurely, particularly as it is experiencing its fifth successive year of recession. The latest OFCE Note (no. 27, 26 June 2013) reviews two of the country’s main weaknesses: first, a lack of competitiveness, and second, a level of corruption that is still far too high to guarantee steady and sustainable growth.

With 4.3 million inhabitants, Croatia initially experienced a period of strong economic growth up to 2008, based on the strength of its tourist industry and on consumption that was largely underpinned by lending from foreign capital. The crisis revealed, yet again, the limitations of this development model and highlighted the country’s structural weaknesses: a high level of dependence on foreign capital, the vulnerability of a system of (quasi) fixed exchange rates, an unfavourable environment for investment and wide-scale tax evasion.

Even though negotiations thankfully addressed some of these problems, others are still unresolved. For instance, with respect to the economy, the domestic market is still not open enough to competition, with the result that the country suffers from a lack of competitiveness. At the legal level, the progress made in the fight against corruption, tax evasion and the underground economy has been woefully inadequate, depriving the country of the foundations for robust growth. Following on the heels of Romania and Bulgaria, the entry of Croatia may unfortunately endorse the idea that curbing corruption is not a prerequisite for joining the EU. In view of the repeated institutional crises that have hit the European Union since 2009 and widespread Euroscepticism, it is now urgent for the EU to makes its priority deepening rather than widening.

By Eric Heyer and Mathieu Plane

Every year the State spends nearly 1 percentage point of GDP, i.e. 20 billion euros, on general reductions in employer payroll taxes on low wages. It is thus legitimate to ask whether a programme like this is effective. A large number of empirical studies have been conducted to try to assess the impact of this measure on employment, and have concluded that it creates between 400,000 and 800,000 jobs.

As these estimates are performed using sector models, they do not take into account all the effects resulting from a policy of reduced social contributions on low wages, and in particular the impact of macroeconomic feedback, i.e. the effect of income gains, competitiveness gains and the financing of the measure.

In a recent study published in the Revue de l’OFCE (Varia, no. 126, 2012), we have attempted to supplement these evaluations by taking into account all the impacts resulting from a policy of reducing contributions on low wages. To do this, we performed a simulation of this measure using the OFCE’s macro-econometric model, emod.fr.

We were able to break down the various impacts expected from these reductions on employment costs into two basic categories:

1. An overall “substitution effect”, which breaks down into a macroeconomic capital-labour substitution, to which is added what can be called an “assessment effect” linked to the targeting of the measure at low wages;
2. A “volume effect”, which can be broken down between rising domestic demand due to lower prices and higher payroll, competitiveness gains due to improved market share internally and externally, and the negative effect of the measure’s financing, whether that involves raising the tax burden (prélèvements obligatoires) or cutting public spending.

Based on our assessment, summarized in Table 1, the exemptions from employer social contributions on low wages lead to creating 50,000 jobs in the first year and about 500,000 at the end of five years. Of the 503,000 jobs expected within five years, 337,000 would be due to the overall substitution effect, with 107,000 linked to the macroeconomic capital-labour substitution and 230,000 to the “assessment effect” linked to the sharp reduction in labour costs on low wages. In addition, 82,000 jobs are generated by the addition to household income and 84,000 by competitiveness gains and the positive contribution of foreign trade to the change in GDP. On the other hand, the “volume effect” on employment becomes negative if the measure is financed ex post: increasing a representative mix of the fiscal structure reduces the overall impact of the measure by 176,000 jobs at 5 years; reducing a representative mix of the structure of public spending reduces employment by 250,000 at 5 years.

Some of the jobs created come from competitiveness gains related to taking market share from our trading partners due to lower prices of production following the reduction in labour costs. This price-competitiveness mechanism works only if, first, firms pass on the reductions in social contributions in their prices of production, and second, our trading partners are willing to lose market share without a fight. We therefore simulated a polar opposite case in which it is assumed that our trading partners respond to this type of policy by enacting similar measures, which would negate our external gains.

While this does not modify the impact on employment related to the “substitution effect”, this assumption does change the “volume effect” of the measure, eliminating 84,000 jobs from gains in market share and increasing the negative effect of ex post financing due to the measure’s multiplier effect on weaker activities. In total, in the scenario in which the measure is funded ex post and does not allow gains in competitiveness, the exemptions on employer social security contributions on low wages would create between 69,000 and 176,000 jobs within five years, depending on how it is financed (Table 2). This result puts the initial figure of 500,000 jobs into perspective.

By Christophe Blot

The euro zone is still in recession. According to Eurostat, GDP fell again in the fourth quarter of 2012 (‑0.6%). This figure, which was below expectations, is the worst quarterly performance in the euro zone since the first quarter of 2009, and it is also the fifth consecutive quarter of a decline in activity. For 2012 as a whole, GDP decreased by 0.5%. This annual figure masks substantial heterogeneity in the zone (Figures 1 and 2), since Germany posted annual growth of 0.9% while for the second consecutive year Greece is likely to suffer a recession of more than 6%. Moreover, taking all the countries together, the growth rate will be lower in 2012 than in 2011, and some countries (Spain and Italy to name but two) will sink deeper into depression. This performance is all the more worrying as several months of renewed optimism had aroused hopes that the euro zone was recovering from the crisis. Were there grounds for such hope?

Although it is very cautious about growth for 2012, the European Commission, in its annual report on growth, noted the return of some good news. In particular, the fall in long-term sovereign rates in Spain and Italy and the success on the financial markets of the public debt issues by Ireland and Portugal reflected renewed confidence. It is clear now however that confidence is not enough. Domestic demand has stalled in France and is in freefall in Spain. All this is hurting trade within the zone, since a decline in imports by one country means a decline in exports from others, which is amplifying the recessive dynamics afflicting the countries in the zone as a whole. As we noted in our previous forecasting exercise and on the occasion of the publication of the iAGS (independent Annual Growth Survey), a recovery cannot in any case rely solely on a return of confidence so long as highly restrictive fiscal policies are being carried out synchronously throughout Europe.

Since the third quarter of 2011, the signals have all confirmed our scenario and showed that the euro zone has gradually sunk into a new recession. Unemployment has continued to rise, setting new records every month. In December 2012, according to Eurostat 11.7% of the euro zone working population were jobless. However, neither the European Commission nor the European governments have adjusted their fiscal strategy, arguing that fiscal efforts were needed to restore credibility and confidence, which would in turn lower interest rates and create a healthy environment for future growth. In doing this, the Commission has systematically underestimated the recessionary impact of the fiscal consolidation measures and has ignored the increasingly abundant literature showing that the multipliers rise in times of crisis and may be substantially higher than one (see the post by Eric Heyer on this subject). Advocates of fiscal austerity also believe that the costs of such a strategy are inevitable and temporary. They view fiscal consolidation as a prerequisite for a return to growth and downplay the long-term costs of such a strategy.

This dogmatic blindness recalls the final comment in the film La Haine (directed by Mathieu Kassovitz): “This is the story of a society that is falling, and to reassure itself as it falls constantly repeats, so far so good, so far so good, so far so good … what’s important is not the fall, it’s the landing.” It is time to recognize that the economic policy in force since 2011 has been a mistake. It is not creating the conditions for a recovery. Worse, it is directly responsible for the return of recession and for the social catastrophe that is continuing to deepen in Europe. As we have shown, other strategies are possible. They do not neglect the importance of eventually making the public finances sustainable once again. By postponing and reducing the scale of austerity (see the note by Marion Cochard, Bruno Ducoudré and Danielle Schweisguth), it would be possible to make more rapid progress in restoring growth and cutting unemployment.

By Marion Cochard, Bruno Ducoudré and Danielle Schweisguth

The cold blast from the autumn forecasts continues with the publication of the European Central Bank’s latest forecasts. Revising its growth outlook for the euro zone downwards (to -0.3% for 2013, against the forecast of 0.9% in September), the ECB in turn is now pointing to the reinforced austerity measures and the growing impact of uncertainty in the financial markets. It is clear that the intensity of the fiscal consolidation is paralyzing growth in the euro zone through the interplay of the fiscal multipliers, while not managing to restore confidence. In this note we show that the recessionary spiral that the euro zone is getting sucked into is not an inevitability.

In the first edition of the 2013 iAGS report, which was produced in partnership with the German IMK institute and the Danish ECLM institute, the OFCE offers an alternative strategy to the current fiscal consolidation policy. This alternative would make it possible to restore growth in the medium term while still meeting the European budget commitments. As Jérôme Creel showed in his latest post, “Could France have a different fiscal policy?”, there is room for budgetary manoeuvring in a way that is consistent with the current treaty framework.

Under the aegis of the European Commission, the European countries have pledged to continue their austerity programmes from 2013 to 2015 on a relatively large scale, especially if we take into account the efforts already made. Apart from Germany, where the cumulative fiscal impulse will be virtually nil, most European countries are planning to reduce their primary structural deficit by more than 2 GDP points between 2012 and 2015 (from -1.4 points for Finland to -7.5 points for Greece, cf. the table).

These adjustments are being undertaken in a very poor economic climate, which has been marked by austerity budgets from 2010 to 2012: growth in the euro zone will be -0.4% in 2012 and -0.3% in 2013. However, according to a series of recent theoretical and empirical studies[1], the fiscal multipliers turn upwards as the economic cycle heads downwards. In this context, the speed and magnitude of the fiscal adjustment is especially costly in terms of growth, and thus counter-productive in terms of the fiscal consolidation.[2] Encouraging a return to growth by easing the austerity would enable the economies of the euro zone to pull out of their recessionary spiral, which is marked by a steep rise in unemployment.

In order to develop this alternative strategy, we used the iAGS model to carry out simulations for the euro zone countries over a period of 20 years. These were conducted in two steps:

1. In our central scenario, we integrated the planned budget cuts announced by the various countries up to 2015. Starting from 2016, we calculated the fiscal impulses needed to achieve the 60% debt threshold by 2032, while limiting the size of these impulses to +/-0.5 GDP points per year. As shown in Figure 1 (central scenario), the structural adjustment carried out between 2010 and 2015 is significant enough in most countries to allow a relaxation of economic policy starting in 2016, while meeting the debt criterion by 2032.
2. For each country, we then decided on an alternative budget strategy by staggering the reduction of the structural deficit over time. This strategy consists in starting in 2013 with the implementation of fiscal impulses of a more limited amount in absolute value than those announced by the current governments (maximum +/-0.5 GDP points per year), and doing this until the adjustment is sufficient to achieve the debt target of 60% of GDP by 2032. This strategy leads to more measured fiscal adjustment for the euro zone countries in difficulty and to slightly positive fiscal impulses in countries whose debt trajectory is in better shape (Germany, Finland, and Italy). For the zone as a whole, the fiscal impulse is almost zero in 2013 and 2014, with the bulk of the adjustment spread from 2017 to 2024.

Figure 1 shows the difference in the level of GDP between the two scenarios. Limiting the size of the fiscal impulses helps to achieve a higher level of GDP and is compatible with a debt target of 60% of GDP by 2032 (alternative scenario). The effectiveness of the fiscal consolidation is enhanced when it is being conducted in an environment that is less unfavourable to the economy. This strategy achieves the same debt target with a cumulative fiscal adjustment that is 50 billion euros less than in the central scenario.

According to our calculations, the alternative scenario would restore a 2% growth rate in the euro zone in 2013, compared with -0.3% if the planned fiscal policies are carried out. The revival of activity would boost the labour market and help to turn around the unemployment rate in 2013, with a decline to 10.2% in 2015, compared with 12.8% if the austerity policies are continued, representing 3 million fewer unemployed people in 2015.

[1] A review of the recent literature on fiscal multipliers: size matters!

[2] What is the value of the fiscal multipliers today?

Zakaria Babutsidze

We all base certain our decisions on expectations. We buy new products because we expect that they carry certain quality, we vote for certain candidates because we expect they will do a “good job”, etc. However, recent research suggests that our expectations affect not only decisions. They also affect the level of enjoyment we derive from taking these decisions (or from experiencing their consequences). In economic terms it means that level of utility derived from the consumption of a product is affected by the expectations of the consumer. Even more technically, we say that people possess expectation-based reference-dependent preferences.

Consider a situation where a decision maker has to make an action. The level of the satisfaction that she will extract from this action (denote this value by x) is not perfectly known to her before the action is taken. This level of satisfaction is realized afterwards. However, a decision-maker has an expectation of what that level might be before making the decision (denote this value by y). A simple interpretation of the theory suggests then that mismatch between x and y will affect the actual satisfaction derived from the action. In particular, if y-x<0, which means that realized satisfaction exceeded expectations then consumer gets an extra boost in satisfaction level and ultimate level of satisfaction is in fact above x. However, if consumer gets disappointed (y-x>0) his satisfaction will be lower than x.

How these satisfaction-affecting expectations are formed is another matter. In this respect we can imagine certain number of opportunities given to the decision-maker to decide on the final expectation that he will base his decision on. What complicates the calculation of the final impression is that early impressions actually affect the later ones. Therefore, more opportunities there are to form the impression harder it is to detect the actual pattern of expectation formation.

Experimental evidence supporting the principles underlying expectation-based reference-dependent preferences is mounting as this entry is being written (Crawford and Meng, 2011; Pope and Schweitzer, 2011; Gill and Prowse, 2012). I have discussed certain business and economic implications of these principles in a recent OFCE working paper. For example, the mechanism implies that advertising campaigns can get wasteful not only from social, but also from individual producer’s point of view as they may scare off potential customers instead of attracting them.

What is interesting is the fact that this principle seems to have been known for advertisers, media strategists and business practitioners for some time now (Parasuraman et al., 1991; Dixon et al., 2010). In fact, we can even speculate that this principle is known for certain politicians (or at least members of their staff).

Take a look at the current US presidential campaign. More precisely at the three debates held between the two presidential candidates (Democrat incumbent Barak Obama and Republican challenger Mitt Romney) that were held on October 3^rd, 16^th and 22^nd. President Obama is known to have lost the first debate and won the third one, while the second debate was called a draw. Now, what is important to understand is that there is no actual score. These “scores” were simply based on the feelings of the electorate surveyed after each debate. These debates can be seen as opportunities to the voters to form their expectations based on which they will cast their votes on November 6.

Sequencing in results has been clearly beneficial for Mr Obama for few different reasons. For example, psychologists have a memory “bin” model of impression formation where the last piece of information received is the most relevant piece in determining the decision (Wyer and Srull, 1989; Babutsidze, 2012). Another reason why the sequencing favors the incumbent is that voters usually prefer voting for candidates that are on a winning streak to voting for those on a loosing streak.

However, what expectation-based reference-dependent preferences can offer is the insight into the judgment of voters on the outcome of single debates. The theory implies that voters would give higher appraisal to the positive performance of the candidate when they expect him not to do well compared to when they expect him to perform well. This means voters would judge President Obama’s performance to be poorer hadn’t they been “primed” by the results of the first two debates.

Presidential candidates might not know about this theory, but Mr Obama tried to use the principle (consciously or unconsciously) by saying that: “Governor Romney, he’s a good debater. I’m just okay” just before the first debate. The fact is that the strategy to set voter expectations low has not been sufficient to convince enough voters that his poor performance was satisfactory. Perhaps this was the case because it indeed was very hard to set expectations lower than those set by Mr Romney who has provided meaty gaffe after gaffe throughout the campaign.

However, the lost first debate might actually benefit President Obama. Somewhat counter-intuitive suggestion of the theory is that had he performed well during the first debate, he’d have a higher likelihood of loosing elections.

By Hélène Périvier

In most European countries the crisis has hit the employment of men more than women. The United Kingdom is no exception: in the population aged 15 and older, between 2008 and 2011 men’s employment declined by 1.6%, against a loss of only 0.3% for women. One could therefore conclude that women have been better sheltered than men from the storm that is battering the labour market in the UK, and more generally in Europe. In absolute terms this is indisputable, but from a larger perspective nothing is less certain.

The gendered impact of the crisis on employment is largely due to the segmentation of the labour market: women and men are not involved in the same sectors of activity; the sectors in which women are over-represented have been less affected by the crisis because of the nature of these jobs. In the UK, women hold 78% of the jobs in “Health care and social work” and 72% in the field of ​​”education”. These fields rely heavily on public or semi-public sector employment and are less exposed to the vagaries of the economic cycle: between 2008 and 2011, employment in the “health and social work” sector increased by almost 8%, and over 12% in education. Conversely, women represent only 11% of workers in construction and 14% in industry, the sectors that have borne the brunt of the job cuts (respectively, -19.6% and -17.3% over the same period). Women thus appear to have been protected from the effects of the crisis in employment due to their over-representation in sectors where employment is less responsive to economic fluctuations. The story could end there, but things are never as simple as they seem, because this explanation remains valid only if the proportion of women in each sector had remained the same during the crisis. But it hasn’t.

A statistical breakdown of changes in employment can help to distinguish what part of the change in employment is due to the change in total employment and what part is due to the change in the proportion of women in each sector. It is clear from Figure 1 that if the proportion of women in each sector had remained constant between 2008 and 2011, then women’s employment would not have decreased by 0.3% over the period but instead would have increased by 2.5%; the decline in the employment of women over the period, though low, is due to a change in their share in certain sectors.

If we look more closely at the sectors that weigh more heavily in the total number of jobs, we find that in construction and industry women were more affected by job cuts then they should have been given their under-representation in these sectors in 2008. In particular, the collapse of employment in construction and industry has disproportionately affected women. The sectors where women have a heavy presence benefited on the contrary from strong job creation from 2008 to 2011: 370,000 more jobs in education and almost 305,000 more in health care and social work. But the jobs created did not benefit women as much as they should have given their share in these types of activity in 2008. Figure 2 shows that in education, the number of jobs held by women would have increased by 271,000 if their share in education had remained the same, whereas the number of additional jobs between 2008 and 2011 that went to women was only 231,700.

In summary, then, in sectors hit especially sharply by the crisis women were over-affected by the job destruction, and in sectors where employment remained dynamic they benefited less than they should have. So ultimately, in terms of absolute employment women suffered less than men, but relatively speaking they were affected more. The segmentation of the labour market that has a significant effect on job equality between men and women has not proved to be an effective shield for women’s employment during the crisis.

By Catherine Mathieu and Henri Sterdyniak

The 9th EUROFRAME conference [1] was held on 8 June 2012 in Kiel on issues concerning the economic policy of the European Union. The topic was: “The euro zone in crisis: challenges for monetary and fiscal policies”. The conference was, of course, dominated by the issue of the sovereign debt crisis in the euro zone. How did it come to this? Should the blame be put on mistakes in national economic policies? Must the way the euro zone is organized be changed?

A number of fault lines appeared (cf. also the related Note in French):

• Some believe that it is irresponsible domestic policies that are the cause of the imbalances: the southern countries were allowed to develop real estate and wage bubbles, while the northern countries carried out virtuous policies of wage moderation and structural reform. The southern countries must adopt the strategy of the northern countries and accept a prolonged dose of austerity. For others, the single currency has allowed the development of mirror opposite imbalances: too much austerity in the North, and too many wage increases in the South; what is needed is a convergence where stimulus in the North facilitates the absorption of the external imbalances in the South.
• For some, every country must implement policies that combine fiscal consolidation and structural reform. For others, what is needed is an EU-wide growth strategy (in particular by financing an ecological transition) and a guarantee of public debt so as to promote a convergence of national interest rates at lower levels.
• Some believe that any new solidarity measures involve developing a Union budget, which means the inclusion of binding rules in the Fiscal Compact; for others, what is needed is the open coordination of economic policies, without pre-established standards.

We provide a report that includes brief comments [2] in a lengthy Note.

[1] EUROFRAME is a network of European economic institutes that includes: DIW and IFW (Germany), WIFO (Austria), ETLA (Finland), OFCE (France), ESRI (Ireland), PROMETEIA (Italy), CPB (Netherlands), CASE (Poland), NIESR (United Kingdom).

[2] Most of the articles are available at: http://www.euroframe.org/index.php?id=7. Selected articles will be published in an issue of the Revue de l’OFCE, in the “Débats et Politiques” collection, at the end of 2012. The report reflects the views of the authors alone.

By Guillaume Allègre

The government has made a commitment to an exceptional, “reasonable” boost to the French minimum wage, the “SMIC”, and to indexation based on growth, and no longer just on workers’ purchasing power. In Les Echos, Martin Hirsch has argued for strengthening the RSA [the French income support scheme] rather than the SMIC. The point is not to oppose the working poor, the target of the RSA, and low wages: redistribution policies need to attack, not just poverty, but inequality throughout the income chain.

In terms of reducing inequalities, there are several strategies: one strategy aims to reduce inequality in individual earnings; a second aims to reduce inequalities in living standards between households, the level at which people are presumed to live in solidarity. There are legitimate grounds for both these strategies. The RSA activité [the income supplement for the working poor] and the SMIC are thus not substitutable (see also “le SMIC ou le RSA?” in French). Unlike the RSA, the fight against poverty is not the objective of the SMIC. The SMIC aims “to ensure that employees with the lowest salaries share in the country’s economic development”. A high minimum wage has the effect of reducing inequalities across the bottom of the wage scale, with increases in the minimum wage impacting up to two times the SMIC. Given the increase in unemployment, in precarious jobs and in part-time work, full-time employees on the minimum wage are certainly not the poorest in society, but they are far from well-off. The SMIC reduces the income gap between the working class and the middle class, which is an objective in itself (though some in the middle class may take a dim view of this: by its very nature, reducing inequality isn’t going to satisfy everyone). In particular, it is not the same thing to receive a high salary or to receive a low salary supplemented by targeted social benefits. These benefits do not confer any rights to a pension or to unemployment benefits. In terms of dignity, the minimum wage level is the value that a society places on work. Social benefits targeted at the poorest people put them in a position of being assisted, which has consequences in terms of social representations (individual and collective). As work is performed by individuals, it is not illegitimate to try to reduce inequalities between employees and not only between the employees’ households.

The proposed boost to the RSA is ambiguous, as the term “RSA” designates both the minimum social benefits for the unemployed and the inactive population (the “base” RSA, formerly the RMI and API benefits) and the income supplement for the working poor (RSA activité). If the proposal for a boost applies only to the RSA activité, it would then be inconsistent with the objective of targeting the most disadvantaged households. If, on the contrary, it concerns the RSA as a whole, which would be legitimate, then it is necessary to be more explicit and to assume that it will benefit mainly the unemployed and the inactive [1]. In March 2012, there were 1.59 million people receiving just the base RSA, and 689,000 the RSA activité (all France), i.e. only one-third of RSA recipients received the activité component.

The implementation of the RSA activité has up to now failed in two ways (“The failings of the RSA income support scheme“): according to the final report of the National Evaluation Committee, it has had no discernible impact on employment, and poverty reduction has been severely limited because of a major lack of take-up of the RSA activité component. We can move quickly over the first point, as there is little emphasis these days on the incentive aspect of the RSA. The main problem of a boost to the RSA activité is indeed the lack of take-up: in the report, take-up for the RSA activité component alone is estimated at 68% in December 2010 [2]. And this is not a matter of the programme coming on line: between December 2010 and March 2012, the number of RSA activité beneficiaries increased only marginally in mainland France, from 446 000 to 447 000. Linking eligibility for the RSA activité to both earned income and family expenses and mixing into a single instrument beneficiaries of a social minimum and the working poor, who are sometimes very well integrated into the labour market, poses problems both in terms of improper assessment of eligibility for the provision and stigmatization. This highlights two causes of the lack-of take-up of the RSA activité: insufficient awareness of the scheme, on the one hand, and voluntary lack of take-up, on the other: 42% of non-applications who do not exclude themselves from eligibility declare that they did not file a claim because they “get by financially otherwise”, and 30% did not file a claim because they did “not want to depend on welfare, to owe something to the state” (p.61). Better information would not be sufficient to solve the problem of lack of take-up. Increasing the minimum wage, on the contrary, has the great advantage of automatically benefitting those affected without fear of stigmatization, since it involves labour income.

Unlike the RSA, increasing the gross SMIC increases labour costs. However, there are several strategies to raise the minimum wage that would not have a net effect on labour costs: the increase could be offset by a reduction in employers’ social contributions. One could also ease employee social security contributions on low wages. But this proposal would probably be censured by the Constitutional Council, which in 2000 knocked down the exemption of the CSG tax on low wages on the grounds that the progressivity of the CSG would then no longer depend on the household’s ability to pay [3]. Finally, a more extensive reform aimed at merging the CSG tax and the income tax would make it possible to reduce taxes on low wages and thus increase the net minimum wage. The integration of the PPE in-work negative income tax would also make it possible to show the amounts involved directly on the payslip.

The fight against inequality clearly should not stop with inequalities in wages between full-time workers. It is also necessary to attack involuntary part-time work, by enabling the workers concerned to move into full-time work and/or by making part-time work more costly by lowering the rate of general tax relief on employer social contributions.

Basically, there is no reason to want to vary the level of the base RSA relative to the minimum wage. However, since the base RSA is indexed to prices, its level has fallen sharply relative to the minimum wage since the early 1990s (see Périvier, 2007). It would therefore be legitimate to significantly raise the base RSA (even if this means reducing the rate of accumulation of the RSA activité component) and to index it to the minimum wage level. This would definitively solve the question of whether to boost the minimum wage or the RSA.

[1] Here it can be seen that the “simplification”, which consists of combining two instruments into one, is not facilitating public debate.

[2] This lack of take-up is partially due to the fact that, for some of those who are eligible (about a third), the potential gains are very low or even non-existent due to the deduction of the sums paid under the RSA activité from the PPE in-work negative income tax. But the lack of take-up is nevertheless high even when looking at the potential gainers (and not simply all those eligible).

[3] Decision No. 2000−437 DC dated 19 December 2000: “Whereas, while the legislature has the right to change the base of the general social contribution to alleviate the burden on the poorest taxpayers, this is subject to the condition that it does not undermine the existence of conditions of equality between taxpayers; that the provision in question does not take account of the taxpayer’s income other than from an activity or of income of other household members or of dependents within it; that the choice made by the legislature to not take into consideration all the contributory capacities does not create, between the taxpayers concerned, a manifest inequality that violates Article 13 of the Declaration of 1789.”

by Michel Forsé

Everyone has undoubtedly had personal experience at least once in their lives of what is suggested by the notion of a “small world”. You meet a complete stranger and you realize that you share a mutual acquaintance. Back in the 1960s, Stanley Milgram provided empirical validation of this intuitive notion by trying to determine how many intermediaries it took on average to link two individuals who did not know each other in a large country like the United States. He conducted a clever experiment that yielded a striking result: 5.2 intermediaries sufficed (or 6 “degrees of separation”, as the saying goes). Other studies since then have produced figures of about the same order. Without going into the technical details, however, these studies had certain problems, including that many of the subjects surveyed dropped out during the studies, and the number of participants were relatively small.

The recent advent of social networks on the Internet has provided an opportunity to consider this issue again, this time on a much larger scale since the Net covers the entire planet. The networks formed by instant messaging, Twitter and Facebook have been studied from this angle. The question posed was always the same: how many intermediaries does it take to link two individuals selected at random from one of the networks. And while the figures may vary slightly, every time the response confirmed or amplified what could be expected based on Milgram’s work.

The case of Facebook is particularly instructive, since it is the largest network analyzed to date. An investigation conducted in 2011 covered 721 million people and some 69 billion links that exist among ​​them. On this basis, it took an average of 4.7 intermediaries to connect two Facebook subscribers worldwide. This figure drops even further, to 4.3, if we restrict ourselves to the United States. There is no doubt therefore that this largely confirmed the theory of a “small world”.

But this still needs to be explained. While many models exist, two seem paramount: one based on a world of clusters connected by weak links, and another that invokes hubs at various levels (international, national, regional, local) demonstrating relative scale invariance. Up to now, these models have been seen as rivals, but there may be potential for combining them, as is suggested in an article published on this subject in the Revue de l’OFCE.