As French businesses look forward to new reductions in social-insurance charges, a recent study by the Bank of France relativises the effect of such policies on their competitiveness.

Permanent reductions

On 1 October the second stage of an emblematic new French labor law came into effect, replacing the Tax Credit for Competitiveness and Jobs (CICE, a conditional tax bonus for businesses which was abolished in 2018). The new measure reduces social-insurance contributions directly, in proportion to the previous mechanism.

By making the reductions permanent the government is hoping for a more direct effect on job creation. Companies now benefit from the reduction whenever they pay salaries, whereas before they needed to wait a year to obtain the tax credit.

Improving competitiveness in price and quality

As its name suggests, the other aim of the CICE was to improve the competitiveness of businesses to enable them to increase their exports. The idea was primarily to boost their price competitiveness, given that the CICE was used by companies to reduce the price of their products. But the CICE also aimed to improve their non-price competitiveness, by creating extra margins which would allow businesses to invest and innovate in order to improve quality and stand out from the competition.

The idea behind this policy is that the erosion of these two forms of competitiveness explains France’s disappointing external trade balance over the last ten years. But a recent edition of the Bank of France’s Bulletin adds some qualifications to this assumption.

The first surprise is that France’s changing labor costs do not appear determinate in explaining the fluctuating price competitiveness of French products. This might be expected: with the geographic dispersion of production, the goods produced in one place comprise a growing quantity of intermediate components, and therefore labor, imported from other countries. (The intermediate goods, for example smartphone chips, are not a finished product but just a part of a finished product.) The price competitiveness of an exported product cannot therefore be reduced to its home production costs: it also depends on the production costs in the countries making up its supply chain.

In France, changes in these imported costs are the cause of three-quarters of the increase in unit labor costs between 2000 and 2014, according to the Bank of France. The main country of this imported inflation: China! Since 2007 the Asian giant’s currency has appreciated and its service-sector wages have increased.