The effectiveness of economic policy and position in the cycle: the case of tax reductions on overtime in France

The economic situation of all the major developed countries has changed significantly during the 2007--10 period. Yet many economic policies have been kept in place. This is true in particular of a key measure in French government policy: tax reductions on overtime hours and their exemption from social charges. In this article we propose simulations of this scheme based on the economic context in which it is implemented. According to our simulations, this kind of measure is pro-cyclical and therefore poorly suited to the current situation of the French economy. Furthermore, even in the case of good conditions, the scheme would not be funded. Without financing, this measure would widen the deficit and would amount to a fiscal stimulus. Financing it through an increase in levies would radically change its nature. Copyright 2011, Oxford University Press.