TCS Daily

The Poverty Trap

By Sylvain Charat - August 8, 2005 12:00 AM

Revered so much by President Jacques Chirac and most of France's political class, the French welfare system is considered by many to be a model for preserving the European social cohesion. Yet among its numerous flaws is one rarely talked about: the poverty trap.

The people caught in this trap are the ones receiving the RMI (Revenu minimum d'insertion). RMI is given to people who do not have any work, but it is not an unemployment benefit. The RMI is supposed to help "insert" beneficiaries into the work world. The problem is that if they get a job, they are likely to lose money.

For example, consider a mother of two children. If she is on welfare with RMI and other benefits and family allowances, she receives about €950 per month. If she were to work earning the minimum wage, she would get €900; most government aid would be reduced but she would still get a little more than €500 euros, for a total of €1,400. But deducting costs for insurance, transportation, lunch and daycare for her two kids, her monthly income would quickly go back down to €900. This is less than when she was on welfare. No gain, so why bother to find a job?

Another example is even worse. Say a man earned €615 monthly from welfare. He then worked and received €700 in wages and €175 from welfare but after deducting insurance, transportation and lunch, he only earned €510 per month. He lost €105 a month for having a job. This is the poverty trap. No wonder there are now 1.2 million people receiving RMI compared to only 370,000 in 1989, when the program was launched. Work does not pay.

Life often brings unfortunate surprises, and sometimes people need help to stay on their feet; welfare then can be justified only if it is an incentive. Yet, in the French system, under the pretence of helping someone in disarray, he is not put back on the trail, but instead stuck in the ditch.

Making the problem worse is that nobody knows how many people are in this situation. Some say the figure is half a million, but the government has no data. The official survey institutes such as Insee never get into those numbers. Indeed, they are too disturbing for the French establishment because they show the failure of the French welfare system.

The French social model creates unemployment. It is set up so that most people who are receiving the RMI pension will lose money if they find a low-wage job. As a result, it is estimated that some 1.2 million jobs for non-qualified people are vacant. To get an idea of the scale of the waste involved, realize that there are 3 million unemployed in France. Yes, there is a pool of jobs that can reduce unemployment by half, but this cannot be done in the name of social cohesion.

The French social model creates poverty. It transformed a system that was supposed to be temporary into a permanent one. Willing to work, most people are thus forced into behavioral poverty, since they are better off staying home. The example is disastrous for children who understand their parents' situation and who are likely to reproduce behavior -- not because they are forced into poverty, but because it is how they grew up. The system destroys the family as a source of economic prosperity.

The French social model is also ultimately anti-free trade. Welfare has created what is called "acquis sociaux", i.e. the idea that all entitlements given by the welfare state are taken for granted and cannot be removed without jeopardizing social cohesion. This is agreed upon by all unions and most of the political class, right and left alike.

This paves the way for more state intervention into French society, increasing government expenditures, creating an economic environment hostile to competition. It would be like asking someone on an IV drip to run a 100-meter race against healthy people.

The European Union does not need such an archaic social model since it is a waste of people and money. Collectivism is a dead-end that is misleading France; let's hope Europe will not fall into the poverty trap.

Sylvain Charat is director of Policy Studies in the French think tank Eurolibnetwork


TCS Daily Archives