VoxEU Column Labour Markets Taxation

The “de-taxation” of overtime hours: Lessons from the French experiment

In October 2007 France introduced an exemption on income tax and social security contributions for overtime work. In the second of two columns on the labour market, the authors show that this reform has had no significant impact on hours worked and that it induced workers and employers to manipulate the overtime hours they declare in order to optimise their tax situation.

In France, since 1 October 2007, remuneration paid for hours worked overtime has been exempt from income tax and a substantial portion of social security contributions. This “de-taxation” was an essential plank of the economic policy introduced after the presidential elections of May 2007. For France's new president, Nicolas Sarkozy, de-taxation of overtime hours offered numerous advantages. In promoting work, it sounded the death knell of the Malthusian culture symbolised by the 35-hour work week, which impact on employment was open to legitimate doubt. But it did not directly challenge the 35-hour legal work week, introduced between 1998 and 2002, to which many French people remain attached.

France is not the only country to have introduced this type of policy over the last 15 years. Since 1996 Austria exempts the extra rate paid for overtime from income tax, with a maximum of 10 hours per month. In Belgium taxes and social security contributions on the extra overtime rate have been reduced since 2005. Italy introduced a similar measure in 2008, but suspended it at the close of that year in the face of rising unemployment. Finally, Luxembourg has had in place exemptions from tax and social security payments for hours of paid work beyond the legal limit since the start of 2008. While none of these countries has undertaken a reform as far-reaching as that of France, the view that de-taxation of overtime hours is an effective means of increasing the number of hours worked appears to have convinced a significant number of policymakers in Europe.

Economic analysis puts the matter in a different perspective. It stresses the fact that if taxation is to be efficient, it must define a tax base that the authorities can easily verify. Now in most cases, it is hard for a third party to verify the number of hours worked when employers and employees have a shared interest in not revealing it. And that is indeed the case with the tax exemption on overtime hours. Wages are flexible enough, employers and wage-earners have an interest in declaring overtime hours in order to benefit from the tax cut but with no need to increase the actual amount of work. Hence it is far from obvious that de-taxation of overtime hours, costly in any case, leads directly to an increase in hours worked. This issue was notably raised by the IMF as early as November 2007.

Earlier empirical studies also confirmed this ability of firms to adjust to a change in the cost of overtime with no real impact on hours worked. For instance, in the US, the Fair Labour Standards Act passed in 1938, instituted a legal weekly duration of 40 hours, and raised the rate of extra pay for overtime hours to 50% once past that legal threshold. Dora Costa (2000) and Stephen Trejo (2003) found that employers reacted to the introduction of the Act by reducing the wage paid for normal hours to partly offset the increase in the cost of overtime hours. Indeed, employers and employees focus on the overall "package," in which the things that count are the sum total of hours worked and the remuneration received. That is why increases in the rate of extra pay for overtime hours are neutralized and have no effect when there is no minimum wage to prevent the reduction of the hourly wage. Conversely, de-taxation of overtime hours opens up wide possibilities of tax optimisation that are costly for the public finances.

Based on the French Labour Force Survey, which seeks detailed information on working time at the individual level, we can see on Figure 1 that paid overtime hours are more numerous in France after the introduction of the reform in 2007 than before. The level of paid overtime hours rose in 2007 and has remained relatively high since, while the economy was entering a deep recession. This increase is not necessarily linked to the reform. It might result from a more intensive utilisation of overtime hours by firms that were avoiding hiring in anticipation of the onset of recession. Moreover, even if the increase in overtime hours is indeed linked to the reform, it is possible that it did not entail a rise in hours actually worked. This scenario is plausible to the extent that a significant percentage of overtime hours worked is not explicitly remunerated – a phenomenon also observed in other countries. In substance, paid overtime hours and length of time worked frequently vary independently, and it is not at all obvious that an increase in paid overtime hours has direct repercussions on the duration of work.

Figure 1. Average number per quarter of paid overtime hours per full-time employee. Non-agricultural for-profit sector

Source : Enquête Emploi, INSEE.

In order to evaluate the impact of the de-taxation, in recent research (Cahuc and Carcillo 2011) we compare the evolution of the paid overtime hours and the hours worked of two groups of individuals, one of which is affected by the reform and the other not. The treatment group is composed of employees who reside and work in France. The untreated group is composed of employees who reside in France but work abroad, in regions adjoining the French border. These transborder workers (travailleurs frontaliers) did not benefit from the de-taxation of overtime hours. Hence, if the reform really did have the effects anticipated, the overtime hours and hours worked of transborder workers ought to have decreased relative to other French employees living in the same region, as long as no other events have modified the relative hours of the two groups of employees. In order to ensure the pertinence of the results obtained, we take into account the differences in economic situation between countries, the evolution of regulatory frameworks on both sides of the borders, as well as the differences between the two groups of employees studied.

Ultimately, we find that the overtime hours of employees working in France rose, relative to those of the transborder employees, starting in the fourth quarter of 2007. This rise in overtime hours applies solely to highly-qualified employees, who have many ways to manipulate the overtime hours they declare in order to achieve tax optimisation, because their work hours are particularly difficult to verify. Conversely, we detect no difference in the evolution of hours worked, whatever category of employee is considered. These results suggest that the upshot of the de-taxation of overtime hours has essentially been tax optimisation, with no real impact on the length of time worked. These results are confirmed by comparing the evolution of the work duration by employees in very small firms and that of independent workers who have not been directly affected by the de-taxation of overtime hours.

Thus, the de-taxation of overtime hours appears not to have fully met its aim. While the wage-earners concerned have indeed benefited from a spike in their remuneration thanks to de-taxation, that has not, on average, come about through working more. De-taxation is costly to the public purse, without any ascertained impact on hours worked.


Cahuc, P and S Carcillo (2011), “The Detaxation of Overtime Hours: Lessons from the French Experiment”, CEPR Discussion Paper 8217.

Costa, D (2000), “Hours of Work and the Fair Labour Standards Act: A Study of Retail and Wholesale Trade, 1938-1950.”, Industrial and Labour Relations Review, 53(4):648-664.

IMF (2007), “France—2007 Article IV Consultation. Concluding Statement”.

Trejo, S (2003), “Does the Statutory Overtime Premium Discourage Long Workweeks?", Industrial and Labour Relations Review, 56(3):530-551.

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