Journal Issue
Working Paper Summaries (WP/94/1 - WP/94/76)

Working Paper Summaries 94/58: Why Is Unemployment in France So High?

International Monetary Fund
Published Date:
August 1994
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High unemployment is, arguably, the most urgent problem facing the French economy. In the first quarter of 1994, the unemployment rate stood at just above 12 percent. Although the slowdown in economic activity has undoubtedly contributed to a worsening of labor market conditions in France, the high rate of unemployment cannot simply be attributed to a lack of demand. The model estimated in this paper gives a NAIRU (nonaccelerating-inflation rate of unemployment) of 8.2 percent in 1992, only 2 percentage points below the actual unemployment rate in that year.

Continuously high unemployment, and features of its composition such as high youth unemployment, suggests underlying structural problems. Although labor supply has been rather high over the last twenty years, high unemployment seems to stem from a lack of job creation. Because of labor market rigidities, demand and supply distortions, such as the twin oil shocks and the high interest rates associated with German reunification, have led to persistent unemployment or hysteresis.

Comparisons with other industrial countries, as well as time series and cross-section empirical evidence in this paper, point to a number of potential causes of structural unemployment in France. These include the generosity of long-term relative to short-term unemployment benefits, the minimum wage, the level of employers’ tax wedge, a mismatch of skills, and the cost of capital.

In November 1993, the Parliament approved a five-year employment plan containing over fifty new measures, including further reductions in employers’ social security contributions for the low paid, wage subsidies for young workers, measures to enhance work time flexibility, and increased funding for government-subsidized employment and training programs.

Many of the above measures will have a positive impact on the labor market, and the economic upturn should bring about a fall in unemployment. However, the key question is whether this decline will be faster and more substantial than during the previous upturn. To ensure this, the paper concludes that it is necessary to take further measures, particularly in areas such as labor costs, where only modest progress has been made. Additional measures that could have an immediate impact include further declines in employers’ social security contributions financed through reducing the generosity and duration of unemployment benefits and a reduction in the legal minimum wage, preferably directly, otherwise through existing employment programs. Other measures to enhance labor market flexibility in the long run include shifting expenditure from passive to active labor market measures (for example, job subsidies for the long-term unemployed instead of unemployment benefits), re-directing labor market programs from the public sector toward job creation in the private sector, and introducing tax incentives for profit sharing.

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