Reducing employer costs depends on low-income earners

Will reducing Belgian employer social security taxes—championed by the last two governments as a cure-all for the economy—really be effective? Only if it focuses on low-income earners, say Drs Muriel Dejemeppe and Bruno Van der Linden, economists at the UCL Economic and Social Research Institute (ESRI).

July 2015: the federal government proudly announces it will reduce employer social security taxes beginning in 2016. While a total funding package of €2.335 million is foreseen for this purpose, the details remain fuzzy. To whom will this reduction apply? What will be the effect on employment? Does the measure make any sense? So many questions require answers before jumping in with both feet. Otherwise, the risk of wasting money on inefficient reforms is very real.

Reducing unemployment in the low-skilled labour market

Drs Dejemeppe and Van der Linden decided to address the issue through the prism of low-skilled labour. Why? ‘The low-skilled labour conundrum has occupied economists since the 1987 “Call of the 72 economists” led by UCL’s Jacques Drèze’, explains Dr Van der Linden. ‘The conundrum is far from being solved: a significant proportion of unemployment is among low-skilled workers and that’s not going to disappear by waving a magic wand. If we want to reduce unemployment, we have to efficiently and sustainably increase employment in sectors offering the greatest potential to employ this segment of the population.’

High salary costs for low-income earners

‘One of the biggest problems is that the quantity of low-skilled labour required by businesses is highly sensitive to the cost of labour. This is due to the possibilities of automation, outsourcing, etc.’ Their idea was to explore reducing costs by decreasing employer social security taxes.

Avoiding the trap of increasing average salaries

It’s fair to question the relevance of focusing only on low-skilled labour and, by extension, low-income earners. Wouldn’t reducing employer social security taxes have the same effect on the employment of average-income earners? Why not take advantage and increase employment across all income segments? ‘Many studies show that this type of reduction on average salaries would tend to translate into an increase in gross salary rather than in employment’, continues Dr Van der Linden. ‘Moreover, the availability of employment in these sectors is less sensitive to the cost of labour.’

Everything depends on low-income earners—yes, but how?

After making these observations, they still had to determine how to put the foreseen funding package to use in a way that every euro is invested to maximum effect. To do so, they relied on the federal government’s 2015 projection of €1.28 million. This allowed them to obtain results, published in the UCL journal Regards Economiques, that the government could actually apply.

‘First and foremost, let’s specify that our proposal targets all jobs, whether or not they’re for new recruits. The aim is to stimulate hiring but also, by sending a very clear message to employers, to curb the tendency to eliminate low-skilled jobs.’ Finally, on the basis of numerous scientific studies, Drs Dejemeppe and Van der Linden propose a structural reduction in employer social security taxes in the following form:

Complete elimination for any salary level equal to the guaranteed average minimum income in Belgium. The employer social security tax is thus reduced by more than €500/month.
Between the minimum income and 1.5 times the gross minimum income (€2,339/month), the reduction in employer taxes decreases in a linear manner. Therefore, for a salary equal to 1.5 times the minimum income, the reduction amounts to €154/month—the flat-rate reduction for employer social security taxes currently in effect.
The flat-rate reduction of €154/month is applied up to the current ‘high salary’ threshold of €4,467/month.
Above €4,467/month, the prevailing employer social security tax rate is 29%.

The upshot: 28,000 to 47,000 new jobs

‘According to our estimates,’ Dr Van der Linden concludes, ‘implementing this reform would cost €1.27 million, thus we’re within the range of possibilities put forward by the government. Furthermore, our estimate doesn’t include savings generated by the effect of this reform on employment: in the short term, it should create between 28,000 and 47,000 jobs.’

Elise Dubuisson