How the French social assistance increased unemployment

In the context of very high unemployment in many European countries, an old economic question receives new attention: Do social assistance programs increase unemployment rates by providing disincentives to take up a job? A recent IZA Discussion Paper by Olivier Bargain and Karina Doorley sheds new light on this question by studying the effect of the pre-2009 French social assistance program, the RMI (Revenue Minimum d’Insertion), on labor supply. The authors find that eligibility for this program, which began at age 25 for single people, led to a drop of between 5 and 9 percent in the employment rate of young high school dropouts. In 2009 the RMI was replaced by a new program, the RSA (Revenue de Solidarité Active), which introduced an additional benefit component for the working poor. This in-work benefit is found to restore financial incentives to work and alleviate the inactivity trap for high school dropouts. With this new system, which combines transfers to both jobless and working poor, extending the program to under 25-year-olds does not seem to create any significant disincentive effects to work. This is an important policy finding, given that the European youth is particularly prone to unemployment.