France: Selected Issues

This Selected Issues paper addresses the question of what policy changes in France are needed under European Monetary Union (EMU), as regards the role of fiscal policy in stabilizing the economy. The fiscal strategy over the past two and a half decades is reviewed, and, against this background, an assessment is offered concerning the role and scope of fiscal stabilizers in France under EMU. The main conclusions is that over the past two and a half decades, fiscal policy operated in a clear countercyclical way in France, but this reflected essentially the functioning of automatic stabilizers.

Abstract

This Selected Issues paper addresses the question of what policy changes in France are needed under European Monetary Union (EMU), as regards the role of fiscal policy in stabilizing the economy. The fiscal strategy over the past two and a half decades is reviewed, and, against this background, an assessment is offered concerning the role and scope of fiscal stabilizers in France under EMU. The main conclusions is that over the past two and a half decades, fiscal policy operated in a clear countercyclical way in France, but this reflected essentially the functioning of automatic stabilizers.

III. Unemployment and the French Labor Market Institutions46

A. Introduction

76. Despite recent cyclical improvements, unemployment continues to be France’s most pressing issue in economic management (Figure III.1; Table III.1). Long-term unemployment is particularly high and makes up a large proportion (40 percent in 1997) of total unemployment, with half of the long-term unemployed having been out of work for more than two years. Although youth unemployment has fallen in recent months, it is still high by international comparison (about 25 percent); in fact the proportion of young people employed fell from 20 percent in 1990 to 14 percent in 1997 (Figure III.2; Table III.2). The situation is especially difficult for the low-skilled; the unemployment rate among blue-collar workers was about 16 percent compared with 5 percent for white-collar workers in 1997. Moreover, the labor market situation is perceived as “precarious” even in the face of strong employment growth; nearly two-thirds of the jobs created in 1997 were in market services and commerce, and in these sectors part-time and fixed-term contracts are now predominant. Survey data indicate that this was not in line with employee preferences. The proportion of temporary jobs has increased from 5 percent in the 1980s to over 10 percent, and part-time work as a share of total employment rose steeply to 16 percent.

FIGURE III.1
FIGURE III.1

FRANCE: Comparison of Unemployment Rates in Selected Countries

Citation: IMF Staff Country Reports 1998, 132; 10.5089/9781451813494.002.A003

Source: OECD, Main Economic Indicators.1/ Prior to 1991, data are for West Germany only.
Table III.1.

France: Unemployment Profile

(In percent of the labor force)

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Source: Insee, Bulletin Mensuel de Statistiques, 1997.
FIGURE III.2
FIGURE III.2

FRANCE: Labor Market Indicators in Selected Industrial Countries in 1997 1/

Citation: IMF Staff Country Reports 1998, 132; 10.5089/9781451813494.002.A003

Source: OECD, Employment Outlook, June 1998.1/ 1996 data for Germany.Countries are: AUS=Australia, BEL=Belgium, CAN=Canada, FRA=France, DEU=Germany, ITA=Italy, JPN=Japan, NLD=Netherlands, NZL=New Zealand. NOR=Norway, PRT=Portugal, ESP=Spain, SWE=Sweden, GBR=United Kingdom, USA=United States.
Table III.2.

France: Unemployment Characteristics in Selected EU Countries

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Source: OECD, 1997.

Standardized unemployment rate.

Incidence of long-term unemployment in percent of total unemployment (based on labor force surveys).

Less than upper secondary education.

For the 15–19 age group.

77. This paper assesses the extent to which French unemployment must be viewed as structural, considers the factors responsible for it, and suggests possible policy solutions.

B. The Magnitude of Structural Unemployment in France47

78. Econometric estimates of the French NAIRU by the staff were last presented in SM/95/141. At the time the NAIRU was put at about 9.5 percent with a confidence interval of about 1.2 percentage points around this point estimate. This section revisits the topic and investigates the possibility of a significant change in structural rate of unemployment since then. The conclusion is that the data do not allow for any strong inference to be drawn at this point. The section motivates the econometric exercise by reviewing the notion of a time-varying NAIRU; a formal statistical model is then briefly described and estimated.

79. Figure III.3 shows a plot of the annual rate of change in GDP deflator inflation (Δπt) against the unemployment rate in the previous year (ut-1) for France over the period 1971 to 1997, as well as a regression line.48 The horizontal intercept of that line corresponds to the (otherwise unobservable) rate of unemployment at which inflation is constant, the NAIRU or structural unemployment rate. For all its simplicity, this picture is misleading. It gives the erroneous impression that the NAIRU stands as an unchanging benchmark, immune from the cyclical influences that drive the (observed) rate of unemployment. In reality, the distinction between cyclical and structural unemployment is blurred: complex dynamics link one to the other and suggest that the structural rate of unemployment is best thought of as a moving equilibrium.

FIGURE III.3
FIGURE III.3

FRANCE: PHILLIPS CURVE 1971–97

Citation: IMF Staff Country Reports 1998, 132; 10.5089/9781451813494.002.A003

Sources: Data from OECD database; and Fund staff calculations.

80. The basic intuition is that workers that lose their jobs in a down-turn may in time also lose the ability to influence the wage bargaining process: they become “outsiders.” The moderating impact of higher unemployment—which in a friction-less world would restore full employment through real wage cuts—is fatally weakened when unemployment itself reinforces the outsider status and the equilibrium rate of unemployment—the NAIRU—ratchets up. This can happen through several channels.

81. First, the human capital of the unemployed may deteriorate: skills, and even basic work discipline, may be lost through lack of practice. As a result, the employability of the unemployed is reduced and the probability of their finding a job becomes a decreasing function of the length of the unemployment spell. An adverse signaling effect comes into play in these circumstances: the unemployment status conveys to a prospective employer information about a job-seeker’s productivity that will deter a job offer. As an additional feedback, discouragement may set in and reduce the intensity of job search. A negative externality emerges then, if a growing number of inefficient job-seekers interferes with the matching process: more vacancies may co-exist with a given unemployment rate (a shift upward of the Beveridge curve), further lengthening the average unemployment spell and the structural rate of unemployment.

82. Another channel through which cyclical developments affect the NAIRU involves the wage-bargaining behavior of the employed insiders and convex adjustment costs. For example, when unions bargain mainly on behalf of incumbent members, a temporary adverse shock to employment will have persistent effects because real wage demands would not reflect the aspirations of disenfranchised workers. More generally, any factor that strengthens the bargaining power of groups facing little risk of unemployment (e.g., costs of adjusting the workforce that empower the currently employed with market power) reduces the wage moderating influence of higher unemployment, that is, it raises the NAIRU.

83. A third channel involves demographics and institutional factors. New job-seekers share many of the characteristics of the long term-unemployed (lack of experience, low productivity due to inadequate human capital, and, possibly, a weaker attachment to work.) So, a larger cohort of young workers will push up the structural rate of unemployment for the same reasons that a longer unemployment spell of an adult worker does. Institutional factors—linked to the benefit system, job-security legislation, or the degree of competition in the product market—play another important role, to be discussed in some detail in the rest of this chapter.

84. A better understanding of the NAIRU as a dynamic threshold has enhanced its usefulness in policy evaluation. At the same time, with that understanding has come greater awareness of the difficulty of pinning down with sufficient precision its value at any point in time. The empirical case against the NAIRU points to 30 years of failure in reaching an agreement within the profession not just on what the NAIRU might be in specific instances but, more fundamentally, on how to measure it. Both “parameter uncertainty” and “model uncertainty” cloud the picture. Confidence intervals around a point estimate are notoriously wide. Two examples make the point: the 1994 NAIRU for the United States has been put at somewhere between 4.8 and 6.6 with 95 percent confidence, and for Canada in 1992 a similar test produced the interval 4.42 to 9.88.49 On the other hand, it could be noted that the uncertainty of NAIRU estimates is unlikely to lead to egregious errors in policy making, when unemployment is reduced gradually in a low inflation environment. In this situation, inflation is unlikely to suddenly soar out of control if unemployment is mistakenly pushed below the NAIRU, and there might be scope for “testing the water”, especially if structural reforms in the labor market give hope that the NAIRU might have fallen. (It goes without saying that, in any event, the policymaker should stand ready to tighten demand management policies at the first signs of overheating.)

85. With this in mind, a Phillips curve model in the spirit of Tobin (1972) has been estimated using quarterly data for France.50 The model consists of a wage equation and a price (or mark-up) equation. Let W% denote wage inflation, P% the rate of price change, U the unemployment rate, and U% its rate of change. All variables are dated and the notation x{l} stands for the variable x lagged once. Then, it is assumed that wages are set according to:

W%=a11+a12W%{1}+a13P%+a14U+a15U%.(1)

Firms set prices according to:

P%=b11+b12P%{1}+b13W%+b14TFP%+b15OIL%+b15UTILDEV,(2)

where TFP% is (smoothed) rate of growth in total factor productivity, OIL% is the (smoothed) rate of change in energy component of the CPI, and UTIL_DEV is the deviation from trend of the rate of capacity utilization.

86. Equation (1) links wage growth to contemporaneous price inflation, lagged wage inflation (reflecting perhaps wage-imitation effects), the unemployment rate and its rate of change (to introduce hysteresis in wage dynamics). Equation (2) makes price changes conditional on contemporaneous wage inflation, past price increases (to capture price stickiness), the rate of productivity growth, the rate of inflation in energy prices (as a proxy for material costs) and a cyclical indicator of pressure on capacity. If lagged wage growth stands for expected wage inflation, then substitution of (2) into (1) give a standard expectation-augmented Phillips curve, relating wage dynamics to the unemployment rate, its rate of change, and a vector of exogenous variables.51 The requirement from theory that the long-run Phillips curve be vertical can be imposed with the following linear restrictions on the unknown parameters: a12 + a13 = b12 + b13 = 1. Under these restrictions and the assumption of stationarity, the model can be solved for the NAIRU.52 Estimation gives values of the underlying structural parameters (and of their t-statistics, in parenthesis) as shown in Table III.3.53

Table III.3.

Wage and Price Equations for France

(1976:2 1997:4)

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Sources: Data from OECD and INSEE; and staff estimates.

Estimated autoregresssive parameter.

Ratio of the number of statistically significant variables with the expected sign to the number of regressors (excluding the constant.)

87. The model fits the data reasonably well, although the overall explanatory power of the price equation is low, suggesting that the (linear) specification could be improved or that some regressors show relative little variation over the sample period.54 Variables enter as a rule with the expected sign, except the rate of change in the unemployment rate in the wage equation, and trend productivity growth in the price equation. In the case of the latter, the restriction on the coefficients of wages and prices in the mark-up equation does not seem to be strongly supported by the data, possibly polluting the estimate of other coefficients in that equation. In this particular exercise, parameter instability has practical effects because small changes in their values lead to large changes in the estimated NAIRU. This can be calculated at about 9.85 percent using a growth rate for total factor productivity of 1.5 percent (as obtained with a Hodrick-Prescott filter applied to the Solow residual from an aggregate Cobb-Douglas production function over the period 1973-96), and a “steady state” rate of energy price inflation of about 2 percent. The “short-run” NAIRU corresponding to (more or less) current values of these variables is slightly lower at 9.7 percent, and is put at about 9.5 four years ago, broadly in line with earlier staff estimates. A formal test of equality of the parameters in the Table with the ones obtained from a re-estimating the model through 1994, does not reject the null hypothesis of equality of the coefficients with very high confidence, suggesting “stability” of the NAIRU since then.55

88. Upon reflection, this result is not surprising. With downward wage and price rigidities a cyclical asymmetry in the behavior of wages and prices emerges: only when the unemployment rate has fallen enough, and the NAIRU is approached from above, do wages and prices start responding. By contrast, even prolonged unemployment gaps may fail to affect price dynamics significantly. As a result of this asymmetry, the information content of the data is highest at the top of the cycle—a juncture which France has not reached since the late 1980’s. Thus, the sample is understandably silent as to the recent evolution of the NAIRU.56

89. More broadly, the figures are at best suggestive and need to be interpreted with caution. First, parameters uncertainty has amplified effects on the NAIRU estimate which is a nonlinear function of those parameters. Second, the methodology used does not lead naturally to the construction of confidence intervals for the NAIRU estimate. More formally, the asymptotic distribution of non-linear functions of least-squares estimators—let alone their sampling properties—is unknown.57 Thirdly, the model—a workhorse in macro-econometrics—ignores key institutional factors that must play an important part in evolution of the NAIRU over time—and can directly be influenced by policy. In light of these considerations, the preceding exercise is intended above all to motivate an analysis of these factors in the following sections.

C. A Bird’s Eye View of the Literature on Structural Unemployment in Europe

90. The economic literature identifies the following factors as sources of structural unemployment: generous unemployment benefit systems and other welfare entitlement programs that discourage job search; high social insurance contributions that discourage employers from seeking employees (especially for low-paying jobs) and workers from seeking jobs; job security legislation that insulates incumbent employees from the forces of demand and supply; union power and collective bargaining arrangements; and minimum wage laws that make wages unresponsive to market forces, prevent wage differentials from reflecting productivity differentials, and encourage the substitution of capital for labor.

91. These institutional arrangements hamper the labor market in basically three ways: (a) by weakening the demand for labor, making it less attractive to hire a worker by explicitly pushing up the wage costs or by introducing a negative shadow price for labor, (b) by distorting the labor supply; and (c) by impairing the equilibrating function of the market mechanism. For example, the demand for labor is determined not only by the conventional market elements such as output prices and the productivity of labor, but also by specific regulations relating to work time or layoffs, and by taxes that raise the cost of paying workers. The supply of labor is partly determined by the reservation wage of potential workers, which in turn is shaped by such institutions as the minimum wage, and the level and duration of unemployment, welfare, and social security payments.

92. The interactions between institutional factors and the structural unemployment are best captured by a wage-price spiral derived from wage bargaining models à la Layard-Nickell-Jackman. These models derive wage-setting and price-setting behavior as the solution of an optimization program. The price-setting relation determines the real wage paid by firms as a function of the markup of price over cost m(V), which is typically a function of other variables, such as antitrust legislation and product market competition, denoted by the vector V. The wage-setting relation determines the real wage chosen by wage setters as a (negative) function of the rate of unemployment, as well as a set of institutional factors denoted by Z (which typically includes factors such as the generosity of unemployment benefits, the relative strength of unions and the overall characteristics of the wage bargaining process, the minimum wage legislation, as well as the tax wedge on the use of labor). The natural rate of unemployment is derived from the equilibrium condition in the labor market, which requires that the real wage implied by wage setting be equal to the real wage implied by price setting,

U*=Φ(Z,m(V))(1)

93. This equation makes clear the implications for structural unemployment of changes in labor market institutions. Any development that exogenously boosts wage-push factors Z or labor demand shifts V (through a higher markup) would raise structural unemployment. Take, for example, measures that increase the generosity of unemployment benefits. Such measures, by enhancing the bargaining power of workers, would lead to a rise in the real wage chosen in wage setting at a given rate of unemployment, leading to an increase in the equilibrium unemployment rate.

94. There is a considerable amount of empirical work based on some versions of equation (1), which has been designed to shed light on the importance of institutional factors on the equilibrium rate of unemployment. The evidence available on European data, however, is not overwhelming; one reason is that the structural unemployment rate itself is not an observable variable. This problem is nonetheless less severe in cross-country study or panel data, and empirical results using these data are somewhat stronger and more persuasive. In an influential study, Layard, Nickell, and Jackman (1991) present estimates of structural unemployment in 19 countries for the period 1956-88, which is explained by variables such as the duration and generosity of unemployment benefits, some measure of the collective bargaining structure, and the proportion of employees whose job tenure is less than two years (a proxy of job security legislation). In the European context, studies by Bean (1989), Layard, Nickell, and Jackman (1991), and Layard and Nickell (1992) found a positive association between structural unemployment and the replacement ratio and the duration of benefits. There is also an extensive literature that mainly points to a significant effect of benefits on unemployment duration (OECD, 1994), and gives support to the hypothesis that search intensity declines with longer unemployment spells (Pedersen and Westergaard-Nielsen, 1993).

95. While minimum wages are widely seen as an important institutional factor behind the high level of structural unemployment in Europe, empirical research on the employment effects of statutory minimum wages has yielded mixed results. Some recent empirical studies have suggested low or no employment responses to changes in statutory minima, although this may be reflecting the low level of the minimum wages (relative to average wages) in the countries considered. This suggests that the extent of unemployment effects varies, depending on many factors such as how high the floor is set, the groups of workers affected, and the distribution of skill levels. Several studies (e.g., Nickell, 1978; Bertola, 1990; Bentolila and Bertola, 1990; Lazear, 1990) have investigated the extent to which unemployment can be explained by employment protection provisions. With the exception of Lazear (1990), these studies suggest that firing costs cannot be blamed for the rise in unemployment, although they are likely to have, reduced employment variation.

96. Cross-country evidence provided by Nickell (1997), which is in agreement with the findings of Bean, Layard, and Nickell (1986), suggests that the overall tax burden may raise unemployment and reduce labor supply. In a time-series analysis, Knoester and van der Windt (1987) report large long-run effects of employee taxes on labor costs for 10 OECD countries. However, the impact on unemployment of different systems of wage determination has proven very difficult to assess in empirical work, not least because of the complexity of the interactions among the different components of each system, and difficulties in measuring them precisely. Nonetheless, an empirical analysis using cross-sectional data for 20 countries during the period 1983-88 (Layard, Nickell, and Jackman, 1991, Nickell, 1997) confirms that unemployment rises with the coverage of collective bargaining and union density, although the relationship is often weak (Scarpetta, 1996).

97. In the French case, empirical studies by Jackman and Leroy (1996), Habermeier and Henry (1996), and Cotis, Meary, and Sobzack (1997) based on estimates of wage and price equations have been reasonably successful in demonstrating a tendency for the nonaccelerating inflation rate of unemployment (NAIRU) to be strongly influenced by variables such as the replacement ratio, the ratio of the minimum wage to average wage, and the tax wedge, but weakly correlated with union density and employment protection legislation. An alternative approach by the OECD (1997), based on a reduced-form structural unemployment equation, also concludes that over the long run, the tax wedge contributed most to the rise in structural unemployment, followed by the relative minimum wage and the unemployment insurance generosity.

D. Role of Institutional Factors: The French Case

98. This section focuses in detail on the benefits system and the minimum wage as factors of unemployment in France. As noted above, the tax wedge remains a crucial problem for labor market performance, but this issue has been addressed in separate staff studies in the context of medium- and long-term policies to slow the growth of public spending and cut the tax wedge, and undertake tax reforms.58 There is little evidence that hiring and firing costs remain important inhibiting factors at present, as stringent administrative procedures that delay and prevent layoffs have been relaxed to a considerable degree since the mid-1980s.

The benefits system

99. The French labor market is characterized by an elaborate system of social protection aimed at safeguarding living standards for the unemployed and those without income. It consists of three types of entitlements: (1) the unemployment insurance benefits—which are related to previous earnings and paid to people with a record of prior employment; (2) the assistance benefits—which are unrelated to previous income, not conditional on previous employment, of unlimited duration, but are means-tested; and (3) the minimum social benefit or revenu minimum d’insertion (RMI)—which provides social assistance of unlimited duration. Some of these entitlements have little to do with the malfunctioning of the labor market, e.g., the minimum allowances for old age (minimum vieillesse), disability (minimum invalidité), surviving widows (allocation d’assurance veuvage), single parents (allocation de parent isolé) and handicapped adults (allocation des adultes handicapés). Others, however, (e.g., allocation de solidarité spécifique, allocation d’insertion, allocation chômage, RMI), have some relevance. In what follows, the focus will be on the unemployment benefit and the minimum social benefit, because these are designed in principle to promote the re-integration of the beneficiaries into the labor market, so as to avert the danger of “inactivity traps.”59

100. The unemployment benefit system in France comprises an insurance element and a solidarity component. The unemployment insurance system is financed by social contributions and is managed by the social partners. It pays benefits only to people with a record of previous employment, with the level of benefits related to previous earnings and of limited duration. Depending on family circumstances, these benefits are supplemented by unemployment assistance (e.g., allocation de solidarité spécifique), financed by state transfers. Following the 1993 reforms, the level of benefits is set to decline the longer the recipient is unemployed; benefit reductions are now smaller, but they occur in several more steps—nine—than previously. The payment period of the benefit varies from 4 months to 60 months. The benefit amount is calculated by taking a percentage of daily reference pay plus a supplement (minimum FF 131.01 per day) and is reduced every four months. It also varies according to age and length of prior affiliation with the unemployment insurance scheme and it is higher for people over 50 years old.60

101. For a 25- to 49-year old person having worked at least 14 months over the two years prior to becoming unemployed, benefits are paid at an initial rate of 57.4 percent of the gross reference wage for 9 months, but they cannot fall below a minimum payment of FF 4,267. Benefits are then reduced to 32.8 percent, but cannot fall below a minimum payment set at FF 2,766 per month. For a 25- to 49-year-old having worked previously at the minimum wage, the initial gross replacement rate is 66.6 percent and it falls to 43.2 percent after 18 months. Having reached its minimum level, the benefit stays at that level. The corresponding net replacement rates are 81.5 percent and 52.5 percent. Replacement rates are higher for older workers and lower for workers who were previously paid high wages. People who voluntarily quit their job are disqualified from unemployment insurance.

102. Despite the 1993 reform, the unemployment insurance system remains generous compared with the OECD average. An index of benefit entitlement constructed by the OECD (1995), taking into account both eligibility conditions and benefit duration, indicates that benefits in France became more generous over the last two decades (Table III.4). For instance, in 1997 the unemployment insurance benefit alone amounted on average to FF 4,234 a month, with about 37.5 percent of beneficiaries receiving less than FF 3,000, and more than a quarter receiving more than FF 5,000.

Table III.4.

France: Generosity of Unemployment Benefits

(In percent of the average wage)

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Source: OECD Jobs Study (1995), Chart 16.

103. The financial incentives and rewards for work are particularly weak for many with low potential earnings, such as single parents, partners in couples where one spouse is not working, and persons for whom part-time employment is the only realistic alternative to welfare. As an example, for a single-earner household with no children, the net replacement at a level of two-thirds of the average production worker’s earnings was 79 percent in 1994, compared with an average for the OECD of 68 percent. The unemployment trap for families with children can also be pronounced, reflecting society’s concern to ensure a reasonable standard of living for children. For a couple with two children, the net replacement is 81 percent, and 88 percent when housing benefits are included, compared with 73 percent and 77 percent for the OECD average. The situation is more acute for households with low incomes, high housing costs, and children, who receive various additional allowances (housing, family, child care subsidies) that boost considerably their net replacement rates. The net replacement rate remains relatively high after 60 months of unemployment, (65 percent) because the unemployed are still eligible for social assistance beyond the 60-month maximum duration of unemployment benefits (Tables III.5 and III.6).

Table III.5.

France: Replacement Rates for Single-Earner Households, 1994

(Replacement rates at the average production worker (APW) wage)

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Source: OECD, Employment Outlook, 1996.

Benefits can include housing allowances, child and family allowances.

Benefit amounts for couples are calculated on the basis of both spouses actively seeking work.

Table III.6.

France: Replacement Rates for Single-Earner Households, 1994

Replacement rates at ⅔ of the average production worker (APW) wage

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Source: OECD, Employment Outlook, 1996.

Benefits can include housing allowances, child and family allowances.

Benefit amounts for couples are calculated on the basis of both spouses actively seeking work.

104. When unemployment benefit entitlements are exhausted, the long-term unemployed in France typically qualify for the revenu minimum d’insertion (RMI), which is a guaranteed minimum income that was introduced in 1989 for persons without income. As in many other countries, the RMI was designed as a “final safety net,” which operates when the household is unable to apply for other more advantageous kinds of benefits, the amounts of which must not exceed that of the main specialized benefits paid to retired adults or adults without access to employment (unemployed, disabled, or sick persons, etc.). The calculation of the amount of the allowance is similar to the practice followed elsewhere. It is a differentiated allowance that depends on the size and composition of the household and the level of other resources available to its members. Its payment is not subject to any time limitation (provided the beneficiary periodically shows evidence of the low level of his other resources). The RMI may be granted to any person without resources, including foreign nationals in certain conditions. On the other hand, it is not payable to persons under the age of 25 if they have no dependent children.

105. As an allowance designed to provide a minimum income, the RMI is a benefit of a general nature, unlike the single parent allowance (allocation de parent isolé) or the handicapped adult allowance (allocation aux adultes handicapés), and it is this open eligibility that explains the heterogeneity of the recipients. RMI beneficiaries are generally young, with half of them (54 percent) between 25 years and 40 years of age, while almost 12 percent are over the age of 55. As regards the family structure, nearly one recipient out of two lives alone and without any children (a third of single men and 20 percent of single women). However, the presence of single-parent families (amounting to 20 percent of total) and large families (i.e., a couple with children, who represent 10 percent of the total) is significant. In sociodemographic terms, almost 70 percent of the recipients are either single, divorced, widowed, or separated. Total expenditure on RMI amounted to only FF 26 billion in 1995 (of which FF 21 billion was paid by the central government and the remainder by the departments), equivalent to 0.3 percent of GDP.

106. Since its introduction in 1989, the number of recipients of the RMI has risen steeply to reach nearly 1 million in 1997. While data on the exit rate from the RMI are limited, the degree of reintegration to the workforce, as measured by the ratio of beneficiaries having access to job or training, has been remarkably stable at 30 percent, with nearly half of those involved in public job schemes (CES, CEC).61 One recent French study (Afsa, 1995) found that the exit rate is strongly influenced by such factors as seniority, marital status, age, and proximity to workplace, and the extent of local unemployment; the longer beneficiaries remain on assistance, the more difficult it is for them to exit; couples and young people tend to have higher exit rates than single people and adults, respectively. The growing number of RMI recipients can also be explained by factors such as a gradual decline in the social stigma associated with claiming the benefit as claiming becomes more common, the appearance of intergenerational transmission of welfare dependency, and a ratchet effect arising from the presence of “loopholes” in the original legislation. But, to a large extent, the relatively low RMI exit rate is due to the failure of the integration policy that was supposed to accompany it. This is attributed to the fact that the return to work is not necessarily a rewarding experience for beneficiaries, in light of the sharp benefit withdrawal and the high payroll tax.

107. Although RMI payments are very low (currently FF 2,500 per month), they are supplemented by family allowances and housing benefits.62 Prior to recent policy changes (see paragraph 125), the combination of the minimum income payments on the one hand, and additional benefits and taxation on the other, implied very high marginal effective tax rates, which dampened incentives for those interested in re-entering the labor market. For example, a single person living on the RMI had a disposable income (net of housing cost) of FF 1,915 per month. Upon taking a full-time job at the SMIC, his net income would increase to FF 3,458, corresponding to a net gain of FF 1,543 (81 percent increase) per month, or equivalently, FF 9 additional income per hour worked (Table III.7). This calculation is based solely on the monetary gain, which is not the only factor affecting the individual’s decision to take a job offer. Other determinants include the forgone leisure time, the loss of in-kind transfers linked to the RMI (e.g., day care, food stamps, free health care, and subsidized transportation fares), and the costs associated with work (transportation, special clothing, etc.), against which must be weighed the deferred replacement income (pension), and an improved social status. When these other factors are taken into consideration, the seemingly large pecuniary gain from employment could be reduced to the point that the incentive effect would vanish. The situation is even more acute for couples with children with marginal effective tax rates exceeding in some cases 100 percent (Table III.8).

Table III.7.

France: Net Monetary Gains from RMI to SMIC for Single Persons

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Source: French authorities.

e.d. denotes earnings disregard.

Table III.8.

France: Net Monetary Gain from RMI for Single Parents and Couples

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Source: French authorities.

108. There was practically no financial incentive for leaving the RMI welfare system until the recent introduction of the “intéressement” mechanism (see paragraph 125). For a single recipient of the RMI, this move would typically lead to a net income loss of about FF 216 per month, owing essentially to the way housing subsidies are computed (when a beneficiary of RMI is receiving an additional allowance, income from work activity is not taken into account in deriving his/her housing benefits (see Table III.7)).

Minimum wage legislation

109. The statutory minimum wage was instituted in France in 1950, with a law establishing the SMIG (salaire minimum interprofessionnel garanti) which was raised in line with prices whenever the inflation rate exceeded 5 percent per year. In 1970, the SMIG was converted to the SMIC (salaire minimum interprofessionnel de croissance). There are three mechanisms for revising the SMIC. First, a rise of 2 percent or more in the CPI automatically triggers an equivalent rise in the SMIC. Second, in July of every year, the SMIC is revised by at least half the increase in the real hourly wage in industry. Third, the government can raise the SMIC at its discretion (coup de pouce). The 10 percent increase following the election of President Mitterrand in May 1981 had a major impact on the proportion of the work force receiving the SMIC. Shortly after the present government took office in June 1997, the minimum wage was increased by 4 percent. A similar adjustment was legislated by President Chirac following the 1995 elections. These three mechanisms ensure that the real value of the SMIC never falls by more than 2 percent at any time during the year, and that the SMIC is regularly adjusted, so that its real value increases when real average earnings rise.

110. The proportion of people paid the SMIC rose from 8.6 percent in 1991 to over 11 percent in 1997 (Table III.9). In particular, the proportion of workers earning the SMIC is quite high among youth, with one-third of the minimum wage earners being under 26. The growing number of “SMICards” in France (particularly among the young workers) is an indication that the minimum wage has a significant impact on large segments of the labor force. The SMIC is not the only form of minimum wage in France, however; the laws also allow wage floors to be set by collective bargaining agreements (these apply only if they exceed the statutory minimum wage). These sectoral minima, however, have grown less rapidly than the SMIC since the early 1980s. Currently, the monthly minimum wage is FF 5,280 on a take-home basis, and FF 6,664 including social security contributions by employees.

Table III.9.

France: Proportion of Workers Paid at the SMIC

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Source: Dares.

In percent of total workforce.

In percent of total SMICards.

In percent of total male SMICards.

In percent of total female SMICards.

111. A commonly used measure to gauge the magnitude of the minimum wage is the Kaitz index (often weighted to allow for the fact that not all workers are covered by minimum wage laws), which expresses the minimum wage as a fraction of average earnings.63 Table III.10 presents estimates of this index for a group of countries, showing that in most European countries, including France, minimum wages are about 50 percent to 70 percent of average wages, significantly higher than in the United States. While the ratio of the minimum wage to the average wage has fallen in most other countries, it has remained practically unchanged in France since 1988 (see Figure III.4).

Table III.10.

France: Minimum Wage Systems in Europe

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Source: Dolado et al, 1996.

Effective April 1999, the U.K. will introduce a minimum wage of £3.60 for people aged 21 and over and £3.00 for young people.

Kaitz index: minimum wage as a fraction of average earnings.

FIGURE III.4
FIGURE III.4

FRANCE: Minimum Wages and Employment in Selected Countries

Citation: IMF Staff Country Reports 1998, 132; 10.5089/9781451813494.002.A003

Sources: IMF, Datafund; data provided by the authorities; and staff calculations.1/ Minimum wage at age 18.2/ In percentage points.

112. One distinguishing feature of the French minimum wage is its wider legal and effective coverage of the workforce compared with other EU countries. The minimum wage, at least in theory, applies to anyone aged 18 or above. In several other European countries, younger workers are entitled to a reduced adult rate, based on the argument that a high minimum wage for teenagers and inexperienced young workers may negatively affect their employment opportunities. Indeed, while the empirical literature tends to disagree about the overall employment effects of the minimum wage, many studies confirm that a high minimum wage has detrimental effects on youth employment (see below). Moreover, distributional arguments for a minimum wage may be less relevant in the case of young workers since low-paid jobs for many of them are often a stepping stone to better ones in the future.64 For example, in the Netherlands, the full minimum wage applies only to those aged 23 and above; for 16-year-olds, it is set at about one-third of the adult minimum, rising to 84 percent for 22-year-olds. This appears to be one of the features that accounts for the favorable labor market performance of the Netherlands—in particular, low youth unemployment—in relation to other EU countries.65 In Belgium, the full minimum wage applies to those aged 21, and above and there are lower rates for those under 21, although the reduction is not as sharp as in the Netherlands.

113. The main concern about the minimum wage is its possible effects in aggravating unemployment, particularly among young and unskilled workers. At the theoretical level, the predicted effect of minimum wage laws is based on the standard neoclassical analysis of labor markets. In a competitive labor market, any increase in the wage of low-productivity workers above the market-clearing level will lead to lower equilibrium employment. The detrimental effects on employment depend on the level of the minimum wage and other specific features (e.g., whether the minimum wage is indexed or not, and if so, whether the link is to prices or earnings). For France, the OECD Jobs Study (1995) concluded that “the link between minimum wages and youth wages does tend to indicate the potential for a negative impact on employment of statutory wage floors.”

114. Empirical evidence from a number of other studies indicates that the SMIC appears to have an appreciable impact on employment of the least-skilled and especially the young. Among the most recent studies, Martin and Bazen (1991) found a significant negative impact of the SMIC on youth employment, with an elasticity ranging from -0.23 to -0.1. Skourias (1992) used different approaches to analyze the effects of the SMIC on youth employment, unemployment, and labor force participation. The estimated employment effects of the SMIC were somewhat below those of Martin and Bazen, albeit statistically significant. In a more recent study, Skourias (1993) obtained elasticities of youth employment with respect to the SMIC in the range between -0.12 and -0.15. On the basis of these results, the author estimates that the rise in the SMIC over the period 1970-90 led to the loss of between 93,000 and 375,000 jobs for young workers. Following a similar approach, Benhayoun (1993) confirms the results for male youth employment, but not for total youth employment.

E. Recent Policy Measures

115. The French authorities are aware of the problems caused by these and other institutional features of the labor market, and they have taken several steps to alleviate their impact on unemployment. Over the past few years, the authorities have introduced a wide range of labor market initiatives, with great emphasis on reducing the cost of hiring people with little training or experience, or whose human capital has been adversely affected by long-term unemployment. (See Table III.11).

Table III.11.

France: Labor Market Policies Since the Early 1980s in Selected Countries

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116. The discussion that follows is mainly concerned with reforms undertaken since mid-1997, but it is important to remember that, to some extent, these initiatives were an adjustment of existing programs. Attempts to address the concerns about labor market “exclusion” have led to a proliferation of programs focused on integrating the young, re-integrating the long-term unemployed, and providing public work for those with a low earning potential. Despite these measures, unemployment continued to increase, prompting the new government in 1997 to shift the emphasis of labor market policies toward streamlining the numerous employment support programs and targeting them better, reforming the employment and training agencies, and making headway in addressing the unemployment traps. There has also been discussion of further reductions in employers’ social contribution for low wage earners.

Streamlining employment support programs and maintaining programs that cut the SMIC for youth workers

117. Existing labor market programs can be grouped into three sets of measures; those involving the use of fiscal transfers in the market sector (e.g., the ristourne dégressive, the contrat initiative emploi, CIE), those involving minimum-wage concessions (e.g., contrats d’alternance), and job schemes in the nonmarket sector involving public subsidies (e.g., contrat emploi solidarité, emploi-jeunes). Moreover, in response to growing concerns about the SMIC’s possible adverse effects on youth employment, the authorities introduced numerous schemes offering rebates to employers, often in the form of exemptions from payroll taxes. The growth in the number of people in these schemes has been dramatic; the proportion of people paid below the SMIC, which had represented only 1 percent in 1981, surged to 8.6 percent in 1997. All in all, there were over 50 job schemes offering subsidies, rebates, and training in 1997 (see Boxes III.1 and III.2). Public spending on these employment programs has risen considerably, with total budgetary costs estimated at FF 156 billion (about 2 percent of GDP).

118. There is a growing recognition that the existing schemes suffer from a number of shortcomings. First, there are too many programs; this implies high information costs, and heavy compliance and controls costs, especially for small firms. Second, many schemes are very generous without much gain in overall employment.66 Third, a number of public job schemes involving fiscal transfers have had only limited success in getting people back into regular work. As a result, some existing programs in the market sector are being trimmed and retargeted to cover only persons in particular difficulties. For example, eligibility for the CIE is now limited for those unemployed for more than two years, and youth having particular difficulty in finding jobs, which would lead to a substantial drop in the number of people covered under this scheme in 1998. In general, resources are being freed to expand the more successful programs, including those that cut social contributions to encourage employment (e.g., the ristourne dégressive). In the nonmarket sector, the authorities are also cutting back ineffective schemes (e.g, the contrat emploi solidarité) and are putting in place new public sector job-creation schemes for adults (contrats emploi-consolidés) and for young workers (emploi-jeunes), to serve both as a staging post for learning basic job skills, and as a means to provide socially useful services, where employees cannot aspire to a market job.

Examples of Employment Programs Involving Fiscal Transfers

In the Market Sector

The contrat initiative emploi (CIE) is an employment-support scheme in the market sector providing an exemption equal to employer social security taxes at the level of the minimum wage plus a monthly subsidy ranging from F 1,000 to F 2,000, thus reducing labor costs for a person earning the minimum wage by up to 40 percent. Initially, the CIE was designed only for those unemployed for more than one year and certain other categories (people over 50 years old, the handicapped, beneficiaries of the contrat emploi solidarité (CES), and those on welfare), but in May 1996, it was extended to youth having difficulty in finding work and not registered with the unemployment office. Presently, they represent about 22 percent of employment under this scheme. In September 1996, eligibility for the CIE of those unemployed for fewer than two years was eliminated, while the monthly subsidy for those unemployed between two and three years was reduced from F 2,000 per month to F 1,000 per month. The number of people covered under this scheme amounted to 210,000 in 1997.

The ristourne dégressive reduces the employers’ social contributions for wages below 1.3 times the SMIC (with the reduction declining to zero as the wage increases), thus providing a reduction in labor costs equivalent to 12.6 percent at the level of the SMIC. Over half a million people were covered under this scheme in 1997, with a total budgetary cost of FF 40 billion.

In the NonMarket Sector

The contrats emploi solidarité (CES) is a subsidized employment scheme of limited duration (3 to 12 months) in the nonmarket sector designed to provide part-time jobs (a 20-hour workweek) for young people having difficulty in finding jobs. Employers’ social security payments are waived and wage costs are largely covered by the State (generally 65 percent to 95 percent of the SMIC) and a compensation fund. Young people, the long-term unemployed, and women are the main beneficiaries of this program. In 1996, youths represented 29 percent of total employment under this scheme, with female youth accounting for about 62 percent. There were over half a million people under this program in 1997, at a total budgetary cost of FF 25 billion.

The contrat-emploi-jeunes (NS-NE) is a scheme providing public employment for young people in activities where few private providers operate (cultural activities, sports, education, environment), with the State providing financial support equivalent to 80 percent of the SMIC for five years.

The contrats emploi-consolidés (CEC) is a subsidized five-year employment program with local entities, covering 200,000 adults over three years.

Examples of Schemes Involving Minimum Wage Concessions/Training

The apprenticeship system (contrat d’apprentissage) is a special employment contract whose duration varies from one to three years. It is intended for young people between 16 and 25 years old who have no qualifications, in order to give them some vocational experience. The apprentice is considered as an employee of the firm that hires and pays him. His wage varies between 25 percent and 78 percent of the legal minimum wage level, according to his age and his seniority in the contract.1 A firm engaged in an apprenticeship contract is exempt from the payment of social security contributions during the contract. At the end of the contract, the employer is under no obligation to hire the apprentice permanently, or even temporarily, nor is the employer bound to give any notice or severance pay. There is also a hiring bonus of F 6,000 and an annual subsidy of F 10,000.

The qualification contrat (contrat de qualification) is a special employment contract with a limited duration (from 6 to 24 months) aimed to give young workers a chance to acquire formal training to boost their qualifications. Its target is the same as the apprenticeship contract but its implementation is simpler. It is intended for young workers aged between 16 and 25 years old, who are unqualified or long-term unemployed. The contracts, which cannot be undertaken by public services, and involve on-the-job training and a more theoretical training period in a training center. The length of the training period specified by the contract must be higher than 25 percent of the contract’s duration, which is generally between 6 and 24 months. The wage paid by the firm to a young worker employed under the contract is fixed as a percentage of the SMIC, depending on age and seniority in the contract.2 The firm undertaking a qualification contract is exempt from paying social security contributions for the portion of the wage not exceeding the SMIC. At the end of a contract, the State provides financial help equivalent to FF 5,000 per contract (fewer than 18 months) and FF 7,000 per contract (more than 18 months).

The orientation contact (contrat d’orientation) is an alternative training program designed to facilitate the integration of two categories of unemployed youth: those between the ages of 16 and 22 years, who have not completed secondary education and have no technical or professional diplomas, and those younger than 25 years old who have dropped out of college and have no other professional diploma. For the first group, the contract is generally of nine months’ duration, arid the orientation period must exceed 25 percent of the contract’s duration. For the second group, the contract is of six months’ duration and is nonrenewable; the orientation period has to exceed 75 percent of the contract period. The wage paid to youth under this program varies according to age: 30 percent of the SMIC for 16-17 years old, 50 percent of the SMIC for 18-20 years old, and 65 percent of the SMIC for those over 21 years old. Employers benefit from an exemption from social security contributions for accident and family allowances.

The adaptation contrat (contrat d’adaptation) is either a limited duration contract (from 6 to 12 months) or an unlimited duration contract. It is aimed toward youth less than 26 years old, who already possess some qualifications but who have yet to find an appropriate job, offering them complementary training adapted to the firm. The training is given alternatively: the practical part of the training is taken on the job, the theoretical part is given by a training center or by the firm itself. The wage level may be equal to 80 percent of the SMIC if the contract is of limited duration, and no lower than the SMIC after the training period if the contract is of unlimited duration. Employers are no longer exempted from social security contributions under this scheme, but training costs may be reimbursed up to FF 50 per hour.

1/ For young people 16–17 years old, the wage is 25 percent, 37 percent, and 53 percent of the SMIC for the first, second and third year, respectively. For those 18–20 years old, the proportions are 41 percent, 49 percent, and 65 percent of the SMIC, and for 21–25 years old, the proportions increase to 53 percent, 61 percent, and 78 percent of the SMIC.2/ During the first year, the wage is equivalent to 30 percent, 50 percent, and 65 percent of the SMIC for young people 16–17 years old, 18–20 years old and 21–25 years old respectively. In the second year, wages as a proportion of the SMIC become 45 percent, 60 percent, and 75 percent for the respective age groups.

119. With labor costs still an obstacle to hiring people with low skills and experience, the authorities are also contemplating maintaining existing programs, which blend action to increase skills with provisions for remuneration below the minimum wage. Indeed, they are planning to extend tax breaks.

Reforming employment and training agencies

120. The government signed a first Progress Agreement (Contrat de Progrès) with the national employment agency (ANPE) for the years 1990–94, followed by a second agreement covering the period 1994–98 (see OECD, 1996). The objective of both agreements was to transform the ANPE into a modern, client-oriented service provider, thereby enhancing its effectiveness. These agreements contain a number of qualitative targets such as widening the range of services, fighting against social exclusion, modernizing the computer equipment, and decentralizing budget management. In addition, the following quantitative targets are specified: increasing the ANPE share of notified vacancies in total vacancies in the economy to 40 percent, tripling the number of notified vacancies for executive staff, and reducing the incidence of very long-term unemployment by 1 percentage point each year. Within the framework of these national targets, a series of operational indicators are established on an annual basis at decentralized levels. As long as target indicators conform broadly to the national objectives agreed with the government in the Progress Agreement, the ANPE has considerable leeway in varying its targets from year to year. Regional employment agencies participate in the annual negotiation process in which detailed performance targets are set, including a number of quantitative indicators such as vacancies filled. Once these targets have been agreed, their implementation is followed up by regular meetings, and monthly and quarterly reports at the national and regional levels. Some financial incentives are offered to offices that meet their targets, but there are no sanctions for those that fail to do so. Nonetheless, the present system has insufficient incentives for agencies, and the management of resources is still strongly centralized.

121. In June 1994, conversion agreements (conventions de conversion) were introduced. Under this scheme, firms are obliged to offer all their redundant employees who are below the age of 57, and who have more than two years’ tenure, the possibility of signing a conversion agreement, with the aim of helping them get back to work by means of individualized measures. Workers who opt for this scheme forgo their rights to severance benefits and regular unemployment benefits. Instead, they receive a special allowance that is higher than their unemployment benefit entitlement and they are not included in the job-seeker register. They are counseled by special technical units within the ANPE offices, which are equipped with the necessary personnel to offer individualized guidance. On the basis of a detailed evaluation of their competencies, workers are offered specific retraining programs or other redeployment assistance for a period of six months. Financial support for employers who hire these workers is also available.

122. Currently, a number of changes are under consideration, including the following: giving regional employment agencies targets in reintegrating the jobless into the labor force and, in parallel, discretion to switch funding between job programs. In the past, such decisions had been made centrally, and considerable scope existed to improve efficiency by directing resources to those programs that were proving most effective in relation to local conditions. Also, to better coordinate support, one-stop offices (incorporating benefit, job-search, and training services) have been introduced for those receiving unemployment benefits—but not yet for those receiving the minimum social benefit. More generally, a high priority is to follow the current EU policy of promoting a more intensive dialogue with those—especially the young—at risk of joining the long-term unemployed (see below).

Reforming the benefit system

123. Following a major reform of unemployment benefits in 1993, the authorities have recently introduced a number of additional supply side measures, focused on strengthening incentives for reintegration into the labor market. The RMI, for example, was not meant to be simply limited to financial assistance to the most needy, but was also supposed to provide them with the support they needed to achieve social and economic integration. In order to prevent this support from being a disincentive to work, the government managed initially to set the level of the allowance in such a way that, whatever its composition, the household would reap a significant benefit if at least one of its members worked full-time, even when paid at the SMIC, rather than simply being satisfied with the allowance.

124. Recently, this approach has been extended to promote the reintegration of recipients of unemployment benefits, with the mechanism of “intéressement” which allows claimants to maintain a part of their entitlement rights and income from any other activity, up to a ceiling and for a certain period. The unemployment benefit—or, more formally, the degressive allowance67—may continue to be granted if the recipient (1) undertakes a part-time salaried job (up to 136 hours per month), providing him an income not exceeding 70 percent of gross remuneration previously taken into account in calculating the amount of the entitlement; or (2) loses a job and keeps one or several other activities providing him income not exceeding 70 percent of total gross income prior to that job loss. This extension of benefits is possible for a maximum period of 18 months; it does not apply to participants in the CES and recipients who are aged 50 and over.

125. An intéressement mechanism exists also for people contemplating moving from welfare to work. It allows 50 percent of earnings to be disregarded (28 percent for those on CES) in benefit calculations during the first 750 hours of activity. With this mechanism in place, there is a substantial net income gain upon taking a job paid at the SMIC, at least for a single person (about FF 1,324 per month or FF 16 per hour worked), but such a gain is temporary (the first 750 hours of work, nine months on an equivalent full-time basis). After the first 750 hours, there is a net income loss amounting to FF 1,540. Thus these existing earnings disregard provisions have not entirely solved the high marginal effective tax rate problem for some segments of the population on welfare (see Tables III.7 and III.8).

126. In March 1998, new legislation (Projet de loi contre l’exclusion) was put forward by the government, allowing beneficiaries to continue to receive 100 percent of the RMI for the first three months, 50 percent for the next six months, and 25 percent for the last three months of the working year. The proposed measure would go a long way toward addressing the high effective marginal tax rates facing beneficiaries of the RMI.

Averting long-term unemployment by giving a “fresh start” to the unemployed

127. In line with the Luxembourg Jobs Summit, the authorities have put forward a National Action Plan, which is aimed at giving young people and adult job-seekers the opportunity to make a fresh start before they sink into long-term unemployment. The goal of the government is to offer a program to all young people and adults registered as unemployed for 6 to 12 months within five years, and to reach 50 percent of this target by 2000. To reach these targets, use will be made of the resources of the public employment service and local partnerships; 350,000 new jobs for young people in new service careers are planned over the next three years in the public sector (the so-called “Nouveaux Services-Nouveaux Emplois” or “Emploi-Jeunes”), with 150,000 jobs already created in 1998. The program will also include a new blueprint called “TRACE” which will offer a route for integration to young people facing severe family, social, and cultural problems. This scheme is expected to cover 60,000 young people in three years. The fresh start program includes: drawing up an individual action plan (and follow-up interviews), followed by a training proposal or a job offer, as well as career guidance and help in job prospecting, or individualized social assistance for people with difficult social problems.

F. Possible Policy Options

128. The new measures highlighted above are steps in the right direction, but much more remains to be done to achieve a well-functioning labor market. Incentive problems remain on the supply side, as employment-conditional benefits have not been viewed as acceptable. On the demand side, labor costs remain an obstacle to hiring the inexperienced and the low-skilled, a situation likely to be exacerbated by the continuing impact of real minimum wage increases (some 3 percent in 1997, followed by a further real increase of 1 percent in 1998). Moreover, the legislation to cut the legal workweek from 39 to 35 hours could have serious implications for those paid at the minimum wage level, because of the political commitment to safeguard monthly income. One approach under consideration is to introduce a monthly minimum wage in addition to the hourly one. This monthly SMIC approach would increase the hourly labor costs at the level of the SMIC by 11½ percent, which would seriously worsen the employment prospects of the low-skilled; it would also compress differentials and thus reduce incentives for the low-paid to enhance their skills. (See the accompanying paper and the Appendix to SM/98/229 for a discussion of these issues).

129. A difficult policy question is how to encourage wage flexibility in the public and private sectors to further reduce labor costs particularly for the low-skilled.68 A dilemma arises because some measures that would enhance labor-market flexibility—such as deep reforms of the benefit and minimum wage systems—involve changes regarded as politically unpopular or socially disruptive. Nonetheless, the experience of the Netherlands suggests that significant structural labor market reforms can be introduced through a consensual process, involving the social partners and clearly not threatening social cohesion. In the Netherlands, the real minimum wage was indeed reduced, youth minimum wages were cut, and benefits scaled down in the context of a comprehensive but gradual reform, which included a cut in public spending so as to reduce the tax wedge. There were strikes, but the Dutch authorities succeeded in changing the rules of the game, in part through careful coordination of, and consultation on, the reforms—albeit because of a sense of national crisis.

130. In this section, a limited number of measures, focused on strengthening incentives for reintegration into the labor market and reducing obstacles to recruiting youth, are suggested as a promising avenue to improve the performance of the French labor market, while maintaining consistency with the government’s social objectives. These reforms (to be presented as a package of measures) would need to be complemented with a range of other reforms aimed at developing entrepreneurship, creating a propitious climate for starting new businesses, increasing the number of innovative undertakings, and promoting product market competition.69

131. As part of policies aimed at reducing disincentives to find a job, both the unemployment benefit (allocation chômage) and the social minima (revenu minimum d’insertion, RMI) could be made less attractive by tightening the eligibility criteria for continued receipt of benefits, including through job-search testing. One suggested avenue is a much stronger insistence on job-search, training, or public sector work. The goal of such pro-active policies is to help keep the unemployed in permanent touch with the labor market. Such policies have been implemented in varying ways in the Netherlands, the United Kingdom, and Denmark. In Denmark, for example, participation in an approved training or education program is required after four years of benefits, to continue receiving assistance in the form of an education allowance equal to the unemployment benefit level to which the person was entitled. Unskilled youth unemployed for at least 6 months are required to participate in an 18-month educational program, and their unemployment benefits are halved.70 In addition to shortening the maximum duration for unemployment benefits, tougher eligibility for continued payment of benefits was introduced.

132. Tighter enforcement of eligibility rules and improvements in the efficiency of benefits administration can have a favorable impact. Ineffective administration, involving payment of benefits to people who are not seeking work or are in “concealed employment” breeds a great deal of inefficiency in resource allocation. While the national employment agency (ANPE) offers a range of training and job-search assistance measures to all unemployed as soon as they register at the public employment office, the system could be improved in ways that could enhance incentives for moving from inactivity to work. First, the job-search requirement, which already exists for recipients of unemployment benefits, should be extended to recipients of social minima. Second, after a certain period, recipients of unemployment benefits could be given a choice between participating in an active education program or accepting some kind of job offer. Third, following the 60-month period after which the insurance benefits are no longer available and the unemployed persons become eligible for social minima, there could be, as a complement to receiving the allowance (RMI), a requirement that the unsuccessful job-hunters participate in an active training program or fulfill some kind of public service/community jobs in order to enhance the recipient’s employability.

133. There is a need to deepen the reforms of the unemployment agency. Presently, the ANPE has a dominant position as a job placement agency, which carries the risk of an inefficient provision of public services. Certain public establishments or jointly managed organizations may engage in public placement activities, but they must be approved by, or sign an agreement with, the ANPE.71 In addition, the effectiveness of support for job-search and training is poorly coordinated between state, departmental, and local agencies. A new blueprint, along the lines being tried in the Netherlands, and already in place for the allocation chômage, is needed to channel contacts with beneficiaries of the RMI through one “front office;” this change could be useful in toughening the conditionality of benefits. As in the Netherlands, it could also be desirable to broaden the role of private agencies.

134. As a part of the policies aimed at mitigating “unemployment traps” and improving work incentives, it is important that newly proposed measures—aimed at gradually phasing out the minimum social benefit when recipients take up employment—be fully implemented, and comparable approaches extended to the “allocation chômage” and benefits in kind. Alternatively, an earned income tax credit could be introduced. As seen above (paragraphs 125 and 126), some progress has been made in improving the financial incentives for a passage from welfare (RMI-support) to work. The situation is different for a move from unemployment to employment, where a sharp withdrawal of the allocation chômage and other in-kind benefits (e.g., the housing allowance) can still result in very high marginal effective tax rates. The intéressement mechanism of earnings disregard and the safeguard of previous entitlement rights (paragraph 124) are steps in the right direction. However, while it has increased the attractiveness of taking up part-time occupation, they have done little to encourage the acceptance of full-time jobs or “short-term employment.” A broader strategy of allowing a newly employed worker to maintain means-tested benefits while earning a salary up to a threshold has proved viable in many countries, including in France, for the RMI, and charts a path to follow. It is recommended that measures in this spirit be extended selectively to recipients of unemployment insurance (and, perhaps, locally provided in-kind benefits such as housing) in cases where high effective marginal tax rates create a powerful disincentive to reintegration in the labor market. An alternative, or complementary, measure would be the introduction of an earned income tax credit as a broader approach to increasing the differential between benefit income and income from employment.

135. For workers without any training or recent work experience, independently of their age, the minimum wage is a hindrance rather than a protection. For them, the objective should be to have automatic access to a package of apprenticeship and training schemes, preferably on-the-job, with remuneration below the SMIC, to reflect their low productivity and the cost of training.

G. Conclusion

136. The strong employment growth experienced over the recovery so far has not been sufficient to bring France’s unemployment to an acceptable level yet, and in spite of an extensive social protection system, there remains an ever-present danger that labor market exclusion will turn into poverty and dependency. Unemployment remains at double-digit levels, with the share of long-term and youth unemployment still high by European standards; meanwhile, the number of people on social assistance continues to increase. This situation has prompted the new government recently to start reorienting labor market policies. One direction is the controversial 35-hour workweek initiative, which is addressed in an accompanying paper. This paper has focused solely on aspects of the French labor market institutions that continue to impinge on employment performance. Complementing the reforms already underway, the targeted measures suggested here should help to improve incentives affecting the labor market, without breaching the government’s social objectives.

References

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46

Prepared by Ousmane Doré.

47

Section B prepared by Alessandro Zanello.

48

Lagged unemployment is used to avoid a simultaneity bias.

49

Staiger D, J.H. Stock, and M.W. Watson: The NAIRU, Unemployment and Monetary Policy, Journal of Economic Perspectives, Winter 1997, p.46, and Setterfield, M. and D. Gordon and L. Osberg: Searching for the Will o’ the Wisp: and Empirical Study of the NAIRU in Canada, European Economic Review 36, 1992, p. 119-136.

50

Tobin, J. The Wage-Price Mechanism:Overview of the Conference, in O.Eckstein (ed.) The Econometrics of Price Determination Conference, Washington, 1972.

51

Inflation in France has been following pretty closely a random walk, which makes lagged inflation the optimal it-step ahead forecast in the Wiener-Kolmogorov sense, for any k.

52

Details on the solution can be found in SM/95/141. A caveat: there sufficient differences between this specification and the one in SM/95/141 to avoid any direct comparison of the estimation results.

53

Data comes from the quarterly data bases of the OECD and WEFA. Rates of changes are computed as year-on-year. Estimation is by restricted two-stage least squares with correction for first-order autocorrelation by Fair’s method.

54

This is especially true of the filtered variables. The model has also been estimated with two alternative methods hoping for better efficiency: Generalized Instrumental Variables, and Three-Stage Least Squares. The estimates of individual parameters from the first method are broadly comparable to the ones in the Table and are nor reported. Estimates from Three-Stage least Squares are somewhat unstable, suggesting a flat likelihood function.

55

The F-test on zero coefficients for dummy variables capturing differences in the intercept and slope parameters of the two regression has marginal significance on the order of 95 percent.

56

Following this line of thought, it could be claimed that the data generation process itself—and not a particular estimation method or specification—is likely to frustrate any attempt to fine-tune the NAIRU estimate, based on the information set used here. This situation contrasts sharply with that in the United States or even in the Netherlands, which are in a more advanced cyclical position.

57

Asymptotic standard errors for nonlinear functions of the parameters can be obtained by taking a first-order Taylor expansion of that function and assuming asymptotic normality. Standard errors are then computed using estimated first derivatives. There are reservations on the robustness of this approach. As a crude proxy for a more rigorous procedure, the NAIRU has been recomputed with parameters values that are increased (or decreased) uniformly by one standard deviation. The calculated values span an implausibly large interval.

58

For a discussion, see SM/97/235.

59

A situation in which recipients remain perpetually on welfare rolls because they have no incentives to take jobs, given the small income differentials between work and inactivity.

60

See OECD (1997) p. 80 and following pages.

61

Dossiers de la Dares, No. 8–9, November 1996.

62

Some 41 percent of recipients are lodged free of charge with their families; others pay rent in subsidized state housing or receive a housing allowance.

63

The international comparison of minimum wages is a daunting task, because the real level of the minimum wages by itself may be not be the appropriate indicator in comparisons between countries with differing productivity.

65

See Kingdom of the Netherlands—Netherlands: Selected Issues Paper (SM/97/139).

66

For example, the Rapport Pericard estimated that the monthly budgetary cost for a person under the contrat-initiative-emploi was about FF 3,519 and FF 4,218 for a worker under the contrat-emploi-solidarité, considerably more than the public contribution to training schemes (FF 1,500 for the apprenticeship contract and FF 2,500 for the qualification contract), see OECD, 1997.

67

Prior to 1993, the unemployment insurance scheme distributed a basic and end-of-entitlement benefits, and also an exceptional benefit, both of which were replaced by a single degressive benefit (the allocation unique degressive).

68

Distributional issues are best dealt with in other ways. See OECD Employment Outlook, 1994, 1995, 1996, where it is recommended that more weight be placed on the market-clearing role of wages, while pursuing equity objectives through other policy instruments.

69

The policy complementarity proposition has been made by Coe and Snower (1997), who argue that labor market reform measures are more likely to succeed if pushed through in tandem with other reforms than if implemented in isolation.

70

An important feature of the reform also included measures to reintegrate the long-term unemployed via “individual action plans” (IHP) based on intensified counseling and job brokering, with efforts graduated according to the length of the unemployment spell. IHP procedures, which are mandatory after two years (six months for youth under age 25), start with an interview in which advice on the availability of active labor market policies is provided and the individual’s employment problems are assessed, leading to an agreement on suitable measures to be taken.

71

A bond in the form of a bank guarantee must be provided by establishments operating as temporary employment agencies.

France: Selected Issues
Author: International Monetary Fund