Master in Economics

Labor Economics

Lecture 1
The Detaxation of Overtime Hours:
Lessons from the French Experiment
Pierre Cahuc1

Winter 2016-2017

1 http://pierre.cahuc.googlepages.com
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Introduction

In October 2007: introduction of tax exemptions on overtime

hours in France

Earnings from overtime hours (above 35 hours, in principle,

with exceptions):
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exempted from social contributions paid by employees

exempted from income tax
lower social contributions paid by employers

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Introduction

Aim of the policy:

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increasing working time "work more to earn more"

circumvent the 35-hour regulation

Innovative policy: only other examples in Austria (1996),

Belgium (2005), Italy (2008), Luxembourg (2008)

The tax exemption was supported by employers (and

employees)

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200903

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200901

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200701

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200301

overtime hours
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Introduction

Average number per quarter of paid overtime hours per full-time employee.
Non-agricultural for-prot sector. Source: Enqute Emploi.
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Introduction
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Economists are reluctant to recommend tax exemptions on

overtime hours
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working time is not easily veriable (Mirrlees, 1971)

incentives to declare more overtime hours to benet from tax
exemptions (announce that bonuses correspond to overtime
hours, pay lower wages on standard hours and higher wages on
overtime hours)

Aim of this lecture

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describe the changes in overtime hours and hours worked

before and after the reform
evaluate the impact of tax exemptions on hours actually
worked

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Introduction

Outline
1.
2.
3.
4.
5.
6.

Theory
Data
The rupture of October 2007
The impact of the reform
Identifying the impact of detaxation on tax optimization
Robustness checks: employees of very small rms and
independent workers

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Theory

Heterogeneous workers

Productivity parameter > 0 distributed over the population

of workers

Type- worker produces f (H ), f (0) = 0, f 0 > 0, f 00

when she works H hours

Identical preferences: U (C , L),

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0,

L = L0 H, leisure
C consumption

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Theory

Legal workweek duration: H

w hourly wage on standard hours

Gross income: R

Taxable income: Rt = R (H H ), where denotes the

amount of income that can be detaxed per overtime hour.

Tax paid by the employee: tRt

Legal rate of extra pay for overtime hours paid by the

employer to the employee is denoted by p

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Theory

Competing rms oer contracts stipulating

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an hourly wage
a length of time to be worked

At labor market equilibrium, the contracts maximize the utility

of employees under the constraint of null prot for rms

The allocation thus obtained is a Pareto optimum

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Theory

Consider 2 dierent cases according to the information of the

government

The government can always verify the monthly wage

1. Hours are veriable
2. Hours are not veriable

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Theory: Veriable hours

Labor cost of an employee (neglecting employerssocial

contributions and taxes):
Cost = wH + pw max(H

Consumption of a type- employee

(1
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0)
H,

t )Cost + t max(H

0)
H,

Labor market equilibrium: maximization of utility subject to

the zero prot condition: production f (H ) equal to labor
cost.

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Theory: Veriable hours

At equilibrium, hours worked by type- workers maximize

U [f (H )

t [f (H )

max(H

0)] , L0
H,

Tax exemptions reduce tax rate on marginal hours

Positive eect on hours worked

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H] .

Substitution eect
Income eet

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Theory: Non veriable hours

Let us denote by
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H the hours actually worked

H the hours declared to the administration
Hmax the maximal number of hours (negleted so far)

The (veriable) labor cost becomes:

w H + pw max(H

0)
H,

The null prot condition becomes

f (H ) = w H + pw max(H

0)
H,

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Theory: Non veriable hours

Therefore, at equilibrium, hours worked H and hours declared

H by type- workers maximize
U f (H )

t f (H )

max(H

0) , L0
H,

H .

Employers and employees have an interest in stating the

highest possible number of overtime hours H

This behavior reduces the hours worked H when leisure is a

normal good

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Theory

Summary of predictions about the impact of tax exemptions:

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If hours are veriable: positive eects on overtime hours and

on hours worked

If hours are not veriable: positive eect on overtime hours

and negative eects on hours worked

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Data

Enqute emploi

Advantages of Enqute emploi

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No other data set with reliable data before and after October
2007
Panel data
Many informations on hours

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Data

Period: 2003q1, 2009q3

Non agricultural and private sector

Workers
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full time (max 72 hours per week)

professionals (cadres) whose working time is computed in days
(not in hours) are excluded
workers on strike, on sick leave, on vocational training... are
excluded

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Data

Data on hours:
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"During the week Monday to Sunday (dates), how many hours

did you put in at your principal job? (Not counting ordinary
hours or days o, or exceptional ones, or legal holidays,
bridges, make-up time, personal unpaid time o, partial
unemployment, training, strike, labor conict)."

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Data

About overtime hours:

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"Have you eected overtime (or complementary) hours, paid

or not?"
"How many overtime (or complementary) hours?"
"Of these overtime (or complementary) hours, how many are
or will be remunerated?"
"And how many have created or will create an entitlement to
compensatory rest?"

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The rupture of October 2007

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The impact of the reform

We compare the evolution of the paid overtime hours and the

hours worked for
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transborder workers, who reside in France but work abroad in

bordering regions
employees who reside and work in France, near the borders

Transborder workers have not beneted from the detaxation

of overtime hours until January 2010

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The impact of the reform

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The impact of the reform

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Estimate the equation

Yict = b0 + b1 (Dt
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Fi ) + b2 Dt + b3 Xct + i + it

Yict : duration of work or the paid overtime hours of individual

i employed in country c on date t.
Dt : dummy variable equal to zero before 1 October 2007 and
to one subsequently
Fi : dummy variable equal to one for wage-earners employed in
France and to zero for transborder workers
Xct : share of exports of goods and services in the GDP of
country c at date t (quarterly indicators of the OECD)
i : xed individual eect

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The impact of the reform

A range of events might aect the paid overtime hours and

the hours worked of the two groups, independently of the
detaxation of overtime hours:
1. The transborder workers might dier from those who work in
France (xed individual eects)
2. The economic situation might be dierent in France and in
neighboring countries (small areas, controls)
3. Fiscal reforms might inuence the overtime hours and the
hours worked in the bordering countries (check no reform)
4. The composition of the two groups of workers might evolve
over time, especially in a period of recession (Individual xed
eects + individuals who kept the same job)

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The impact of the reform

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The impact of the reform

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Identifying the impact of detaxation on tax optimization

In line with our theoretical part, the dierence between the

gapof employees whose hours of work are di cult to verify
and that of other employees whose hours of work are easily
veriable should decrease for workers who work in France
compared to transborder workers.

This triple dierences strategy allows us to evaluate the

potential impact of the detaxation of overtime hours by
comparing the behavior of individuals among the group of
French workers, taking transborder workers as a control group.

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Identifying the impact of detaxation on tax optimization

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We estimate the following equation:

Yict

= b0 + b1 (Dt Fi ) + b2 Dt + b3 Xct + b4 (Dt

+b5 (Dt Fi Oi ) + i + it ,

Oi )

where Oi is a dummy variable equal to one for managers,

technicians, professionals, supervisors and those employed in
the intellectual and artistic professions, and to zero for laborers

. Other types of workers are excluded from the sample when

this equation is estimated.

The behavior of workers whose hours are di cult to verify,

relative to those whose hours can be veried more easily, is
captured by the triple dierences coe cient b5 .

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Identifying the impact of detaxation on tax optimization

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Robustness checks: employees of very small rms and

independent workers
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Alternative strategy of identication: select a dierent group

of individuals who have not been directly aected by the
reform.

Independent workers who do not employ a wage-earner are

not aected by detaxation

Compare independents not employing a wage-earner with

wage-earners in rms having just one employee.

We study separately
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independent craftmen and employees in craft industry

retailers and retail employees

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Robustness checks: employees of very small rms and

independent workers
Hours worked
Time trend
Number of observations
incl. employees
incl. independent

(1)

(2)

(3)

.206

.212

.003

(4)

.003

(.441 )

(.442 )

(.010 )

(.010 )

No
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348
1 123

Yes
1 471
348
1 123

No
1 471
348
1 123

Yes
1 471
348
1 123

Impact of the detaxation of overtime hours on hours worked. Control

group of independents. (1) and (2): all employees (craft and retail
sectors). Dependent variable: hours worked. (3) and (4): all employees
(craft and retail sectors). Dependent variable: log of hours worked.
Regressions with individual xed eects. Robust standard deviations in
parentheses. * signicant at 10 percent, ** signicant at 5 percent, ***
signicant at 1 percent.
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Conclusion

The detaxation of overtime hours:

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no signicant impact on hours worked

positive impact on paid overtime hours which create an
entitlement to tax reductions.

Detaxation is a measure costly for the public purse, without

any ascertained impact on hours worked.

Open questions:
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employment
employee motivation

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Appendix 1: Working time regulation and overtime hours

Overtime hour:
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any hour worked above 35h per week or 1607h per year
for most professionals (cadres), working time is computed in
number of days (instead of hours): any day above 218 worked
days per year is considered overtime

Working time ceiling (when working time is computed in

hours):
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48h worked per week (44h on average over 12 weeks)

10h worked per day

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Before Oct. 2007:

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overtime hours paid at a premium of 10 to 50% depending on

rm size, industry agreements and number of hours (50% after
8 hours)
overtime hours can also give right to a "compensating rest"
instead of payment if collective agreement states so
220-hour ceiling per year except if industry agreement states
otherwise
overtime hours above ceiling require administrative
authorization and give right to an additional "mandatory
counterpart in rest"

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After Oct. 2007 ("TEPA" law):

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overtime hours paid at minimum premium of 25% (from 10%

previously for rms with 20 employees or less), except in case
of collective agreement.
employee social contributions on overtime hours earnings:
rebate of 21.5% of gross wage
no income tax on overtime hours earnings
cut in employer social contributions (0.5 euro per hour in rms
with more than 20 employees and 1.5 euro per hour in rms
with less than 21 employees)

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Appendix 2: Statistics on transborder employees

Employee:
Male
Age

Transborder

Working in France

75.2%
39.00

68.7%
36.95

Education

13.09

13.02

(0.18 )
(0.05 )

Number of children
Hours worked

0.76

(0.02 )

0.76

(0.02 )

(0.01 )

41.91

38.63

(0.08 )

Overtime hours

(0.08 )

0.46

(0.03 )

0.56

(0.04 )

(0.02 )

3, 283

20, 742

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