Front Matter Page

© 2003 International Monetary Fund

October 2003

IMF Country Report No. 03/335

France: Selected Issues

This Selected Issues paper for France was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on September 24,2003. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of France or the Executive Board of the IMF.

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Front Matter Page

INTERNATIONAL MONETARY FUND

FRANCE

Selected Issues

Prepared by Marcello Estevão, Francisco Nadal De Simone (both EU1), and Eric Mottu (MED)

Approved by European I Department

September 24, 2003

Contents

• Overview

• I. Potential Growth of the French Economy

  • A. Introduction

  • B. Production Function Approach to Estimating Trend Growth

  • C. Trend Growth Calculation

  • D. Conclusion and Policy Implications

  • Annex I: Sensitivity of Coefficient Estimates of a Cobb-Douglas Production Function for the French Economy to Adjustments to the Net Capital Stock by the Intensity of its Use

  • References

• Figures

• I.1. Total Employment and Net Capital Stock

• I.2 Business Sector Output per Hour Worked PPP

• I.3 Labor Force Growth, Participation Rate, and Total Hours Worked

• I.4 TFP Growth: Estimates and Adjusted Solow Residual

• I.5 Growth and Trend in French Real GDP

• I.6 Capital Stock Growth and the Work Week of Capital

• I.7 Employment and Hours

• I.8 Labor Force Growth and Participation Rate

• Tables

• I.1 Elliot, Rothenberg, and Stock Test for Unit Roots

• I.2 The Johansen-Juselius Maximum Likelihood Test for Cointegration

• I.3 Parameter Estimates of the Cobb-Douglas Production Function with TFP as a Latent Variable

Overview

1. As most industrial countries, France experienced a revival in trend growth in the second half of the 1990s, but impending negative forces now loom. Increased structural employment accompanied by low inflation during the last cycle resulted largely from wage moderation, labor market reforms, and policies that supported labor demand and supply.¹ Opposing forces have been, however, also at work: French labor force growth has been declining—it is expected to become negative in 2006 as the demographic shock sets in; the statutory workweek was shortened to 35 hours; and a steady increase in taxes during the 1990s raised the French tax burden to one of the highest in the OECD by 2000.

2. This selected issues paper first explains the recent increase in trend growth, and then discusses how labor market and tax policies could best sustain it.

• The recent recovery of French trend growth resulted mostly from an increase in structural employment as well as from capital deepening made possible by investment but also, in a minor way, by enhanced use of shift work. These forces more than offset the decline in total factor productivity growth in the 1990s (Chapter I).

• France’s strong employment performance in the second half of the 1990s can be partly explained by the labor market policy mix it pursued. Policies favored subsidies to direct job creation, and put less resources into training programs. Consistently, measures with a positive employment effect also contributed to wage moderation. However, as these policies have a high budgetary cost, they are not a good substitute for reform of labor market institutions that affect employment negatively (Chapter II).

• With a view to promoting growth, since 2001, France has reduced personal and corporate income taxes, local business taxes, social security contributions, and introduced a refundable tax credit, but the budgetary room left for further meaningful tax cuts is virtually inexistent. Nonetheless, even a revenue-neutral change in France’s tax structure could benefit and foster durable growth. A promising avenue includes: altering the tax structure away from labor and toward a broader basis, widening the VAT tax base by curtailing the extent of exemptions and reduced rates, cutting corporate and capital taxes and improving their neutrality, and simplifying local taxes (Chapter III).

3. Policy implications are straightforward. Policies that enhance labor market flexibility, increase incentives to labor force participation, and promote domestic and foreign investment—inter alia via modifications in the French tax system structure—are needed to offset the adverse effects of demographics and sustain trend growth in the medium term.

Contents

• II. Employment and Wage Effects of Active Labor Market Policies

  • A. Introduction

  • B. Why Might ALMPs Increase Employment?

  • C. Identification Issues and a Critical Survey of Previous Studies

  • D. Empirical Identification of the Effect of ALMPs on Employment Rates

  • E. ALMPs and Wage-Setting Behavior

  • F. Expenditures on ALMPs in France

  • G. Final Remarks

  • Appendix I: Synthesis of the Relevant Literature

  • Appendix II: The OECD Labor Market Policies Database

  • Appendix Tables

    • II.A.1. Active Labor Market Programs in the OECD – LMP Database

    • II.A.2. Passive Labor Market Programs in the OECD – LMP Database

  • Appendix III: Data Definitions and Sources

  • References

• Figures

• II.1. How Might ALMPs Affect Employment?

• II.2. Expenditure in Active and Passive LMPs, and Business Employment Rate

• II.3. Business Employment Rates, and ALMP and PLMP Expenditures as a Share of GDP

• II.4. Expenditures in ALMPs as a Share of GDP

• Tables

• II.1. Active Labor Market Policy and Employment

• II.2. Robustness Check: Changes in Period Cutoff and Definitions of LMPs

• II.3. Robustness Check: Effects of Omitting Variables and/or Countries

• II.4. Robustness Check: Detailed Breakdown of ALMPs

• II.5. Estimates of the Wage-Setting Curve

• II.6. Robustness Check: Effects of Omitting Countries and Detailed Breakdown of ALMPs

• III. Tax Reform and Potential Growth in France

  • A. Brief Overview of the Literature

  • B. The French Tax System: Stylized Facts and Issues

  • C. Recent Tax Policy Reforms

  • D. Reform Options

  • References

• Figures

• III.1. Tax Burden, 1982–2002

• III.2. General Government Total Tax Revenue, 2001

• III.3. VAT Revenue, 2001

• III.4. VAT Efficiency Ratio, 2001

• III.5. VAT Revenue in Selected OECD Countries, 1980–2001

• Tables

• III.1. Structure of General Government Revenue, 2002

• III.2. Structure of General Government Revenue in Selected OECD Countries, 2003

• III.3. Effective Tax Rates in the European Union, 2001

• III.4. Effective Tax Rates in Selected OECD Countries, Average 1990-2000

• III.5. Average and Marginal Tax Wedge in Selected OECD Countries, 2002

• III.6. Statutory and Effective Tax Rates on Corporations in the EU, 1999

• III.7. Statutory and Effective Tax Rates on Corporations in Selected OECD Countries, 2001

• III.8. VAT Rates in the EU and OECD Countries, 2002

• III.9. Personal Income Tax Rates, 1999–2003