This Selected Issues paper on France underlies public intervention in financial markets. Econometric analysis indicates that in the long term, consumption tracks disposable income closely but is also affected by wealth effects. A counterfactual exercise suggests that a lower return to experience could be responsible for lower early wage growth in France. Increased training could enhance the employment experience of the low-skilled young worker in France provided that its cost is shared between the employer and the employee.

Abstract

This Selected Issues paper on France underlies public intervention in financial markets. Econometric analysis indicates that in the long term, consumption tracks disposable income closely but is also affected by wealth effects. A counterfactual exercise suggests that a lower return to experience could be responsible for lower early wage growth in France. Increased training could enhance the employment experience of the low-skilled young worker in France provided that its cost is shared between the employer and the employee.

III. Unemployment, Wage Growth, and Job Mobility of Young Workers in France and West Germany56

A. Introduction

69. Young workers in Germany enjoy better labor market outcomes than in many countries in continental Europe. In contrast, it is often said that the French labor market is specifically tough on young workers, because they suffer from a typical outsider problem as they are seeking to enter the labor market for the first time. It is also argued that French low-wage workers are put at a disadvantage by the system, to the extent that minimum wage regulations reduce their chances of obtaining jobs.

70. Within the European countries, there are cross-country differences in the incidence of unemployment,57 which are more noticeable when unemployment rates are observed for particular demographic groups. While the unemployment rate of the prime age workers has in most European countries fluctuated around generally moderate average rates, those of the youth have fluctuated quite widely around considerably higher average rates. There is a clear division between the Nordic countries (with the exception of Finland), where the gaps between youth unemployment rates and the aggregate ones are relatively small, and the Southern European countries, where youth unemployment rates have been persistently at much higher levels than those of prime age (Table 1).

Table 1.

Unemployment Rates in Selected European Countries, by Age Group, 2000

article image
Source: OECD, Employment Outlook 2004.

71. It has been stressed in the literature that the unemployment rates of young, unskilled workers are most affected by labor market institutions that impose some kind of wage floor (minimum wages, collective bargaining, employment protection legislation, unemployment benefits, and so on). According to Bertola, Blau, and Kahn (2002), many labor market institutions have stronger and more clear-cut implications for the distribution of wages than for the level of the average wage, and, hence, for the composition of employment and the incidence of unemployment across population groups with different levels of productivity. The incidence of youth unemployment has also been related to the effectiveness of the educational system at easing the transition from school to work (OECD, 2000), to the role of the family at providing income support (Bentolilla and Ichino, 2000) and to the evolution of the relative size of the youth population (Korenman and Neumark, 2000).

72. In this paper, we do not study the causes of French youth unemployment, but rather how costly it is, in terms of career path and wage growth, for French workers to spend such a long period of their life in unemployment. West Germany is used as a benchmark. Economists have looked increasingly at several aspects of education and labor market institutions in Germany for guidance. Germany’s apprenticeship system, which many believe greatly facilitates the school-to-work transition, is often held up as an example to emulate and has been credited with reducing youth unemployment (Buechtemann, Schupp, and Soloff, 1993).

73. Youth unemployment in Germany has been systematically below the adult rate, while in France it has been about twice as high. Wage growth has been higher in Germany than in France for the age group 21-26. By the late 20s, however, both differences in wage growth rates and unemployment vanish. This leads to a permanent stable difference in levels of hourly income by age 30. Standard theories of experience accumulation in the spirit of Becker (1964) and Mincer (1974) imply that on-the-job experience accumulation is proportional to time spent working. Thus, observed differences in wage growth and unemployment rates in France and Germany could be driven by differences in early labor force attachment. On the other hand, models of job search imply that high unemployment and job turnover may simply be a sign of beneficial job mobility. Consistent with this observation, it has been noted that young French workers have a much higher entry rate into but also a higher exit rate out of unemployment than their German counterparts (Lauer, 2003).

74. The paper proceeds in two steps. Using large cross-sectional labor force surveys and administrative level datasets, first, it evaluates the importance of job search theory by decomposing wage-growth in “on-the-job” and “between-jobs” growth. If turnover is beneficial for French workers, one should expect higher “between-jobs” wage growth compared to Germany. The decomposition will also be used to assess the overall importance of job mobility in early wage growth in the two countries. Second, it looks at wage growth in the two countries from a human capital perspective, to assess the potential role of labor market attachment (the amount of time spent working) and returns to experience. This approach is crucial to establish the cost of unemployment in the early stages of career and to provide policy guidance. If low labor force attachment causes low wage growth, a policy designed to directly reduce unemployment would be the best option. On the contrary, if returns to experience are driving low wage growth, higher investment in training may be necessary.

75. The results of the analysis indicate that:

  • Higher unemployment in France does not appear to be driven by higher mobility induced by search. Although young French workers are more mobile initially, the overall degree and pattern of mobility between jobs is similar in France and Germany. (The patterns of job change reflect in part the widespread use of fixed-term or apprentice contracts in both countries.)

  • As a result of the decomposition of wage growth in “between-jobs” and “on-the-job” wage growth, it appears that between-jobs growth contributes similarly to wage growth of young workers in France and Germany (by one third). The rest is explained by differences in on-the-job wage growth.

  • It appears unlikely that varying degrees of early labor force attachment can explain the entire difference in wage growth. Instead, lower returns to experience could be responsible for lower early wage growth in France. These results suggest that labor market experience is only a partial substitute for formal training. A simple comparison of hourly wage profiles indicates that this might in particular be the case for those with vocational and intermediate levels of education. For these workers, more explicit training arrangements might be a valid option.

The paper is structured as follows. Section B briefly discusses the institutional environment and provides descriptive evidence on early labor market conditions in France and West Germany. Section C gives an overview of the implications of the main theories of the role of labor market experience, presents the conceptual framework of the paper, and contains the main results. Section D concludes.

B. Labor Market Institutions and Trends in France and Germany

Institutional background

76. Young French and German workers face different institutional environments when exiting secondary school. Almost two thirds of young Germans start an apprenticeship at the end of secondary education, most commonly after nine or ten years of schooling. Apprenticeships last two to three years and involve formal schooling as well as training on the job. During apprenticeships, wages are significantly lower than market wages for similar workers. After apprenticeship training, a small fraction of these workers goes on to become specialized technicians or attends two-year colleges. Workers who stay in school 13 years to obtain a high-school degree either obtain apprenticeship training or go on to university, which can take up to six or seven years. Two noteworthy features of the German system are: first, there is no statutory minimum wage applying to all workers. Instead, employer associations and unions bargain regional industry-level pay scales that only apply to their respective members. Apprentice wages are bargained over separately, and apprentice contracts are by nature fixed-term, i.e., firms do not face a commitment to employ trainees at the end of training. Second, since Germany has a partial compulsory schooling until age 18, even those who exit school after 9th or 10th grade usually attend some form of vocational training or partial schooling.

77. No large-scale apprenticeship system exists in France. Instead, after nine years of compulsory schooling (commonly until age 15), French youths can choose between either upper level secondary schooling or a variety of vocational schools. This leads to a higher variety of educational degrees in France58 and, as further discussed below, to a larger fraction of workers without any vocational training than in Germany. Some of the apprenticeship and vocational schemes have been introduced as active labor market policies to reduce youth unemployment (Box 1). The fraction of young French workers that is employed on fixed-term contracts by age is only slightly lower to that in Germany when apprentices are counted. Fixed-term contracts are 6-24 months long and are thus shorter than the average apprenticeship, which lasts three years. In contrast to the German system, France has a national minimum wage (the SMIC).

Data

78. We use nationally-representative data bases for each country, which allow us to measure young workers’ employment outcomes and also permit comparisons across age groups. For France, the data are drawn from the Enquête Emploi, collected by INSEE, a yearly labor force survey covering 1/300 of the French population. The dataset includes details on individual workers’ net and gross wages; hours of work; educational and demographic characteristics; sector and category of occupation and numerous other individual-specific variables. The dataset has a panel structure, which makes it possible to analyze labor market transitions.

79. The data for West Germany is drawn from the Mikrozensus, an annual cross-sectional survey of 1 percent of the German population covering similar variables as the Enquête Emploi. Since the Mikrozensus is purely a repeated cross-section, the IAB-Subsample (IABS) is also used to construct mobility measures for West Germany. The IABS is a 1 percent sample from the national employment registry of social security records spanning the period from 1975 to 1995 and contains detailed administrative information on wages and employment transitions.

80. The figures shown throughout the paper are from 1993 for West Germany and 1991 and 1993 for France. The difference of unemployment rates and wages by age is stable throughout the 1990s; the pattern does not change substantially for France by the year 2000 (Figure 1) and for Germany by 1996. The age distribution is thus treated as stationary, and differences in cross section are interpreted as informative for longitudinal patterns of interest.

Figure 1.
Figure 1.

France: Unemployment and Wage Behavior

Citation: IMF Staff Country Reports 2004, 346; 10.5089/9781451813623.002.A003

Source: IMF staff calculations.

France: Youth Employment Policies in France.

Since the mid-1970s, different measures have been developed by the French government to combat youth unemployment. Today, the programs can be classified according to the characteristics of eligible participants, the employment sector (public or private) or the legal status (training course or labor contract). In 2003, 600,000 entrants in the business sector and 400,000 in the nonbusiness sector were financially assisted through public programs.

Three main types of public interventions can be distinguished:

  • job creation in the public sector (mainly through wage subsidies) directed at low-skilled unemployed young adults;

  • promotion of training programs in the private sector, including both classroom education and on-the-job training; and

  • reduction of total labor costs in the private sector, in order to increase the labor demand for unskilled workers

The first type of programs include the contrat emploi solidarité (CES), contrat emploi consolidé (CEC), contrat emploi jeunes (which was terminated in 2002), and contrat emploi ville. The most representative program in this group is the contrat emploi solidarité. This contract is part-time (20 hours) and fixed-term (usually from 3 months to 12 months, but with the possibility to extend it up to 36 months for people with poor employment prospects). The hourly wage is the minimum wage, and the employer is exempt from social security contributions. The CEC is similar in nature to the CES but is for workers experiencing particular difficulties in finding a job and who have been already in CES. It can be fixed-term (CDD) or open-ended (CDI), full-time or part-time (30 hours minimum), from 12 months up to 60 months.

The second type of programs includes several apprenticeship contracts (contrats de qualification, contrats d’adaptation and contrats d’orientation). These contracts offer part-time work in a firm, complemented by part-time education in a public training center. They vary in length (between six months and three years), the wage is calculated as a fraction of the minimum wage, and they are addressed at different categories of young workers (different levels of education, long-term unemployed, different age groups). The employer is exempt from social security contributions.

The most representative program of the third type is the contrat jeunes en enterprises. Implemented in June 2002, this program reduces for three years the cost of labor for employers hiring (as CDI) workers 22 years old or younger with a level of education lower than secondary school.

Unemployment, labor force attachment, and wages by age and education

81. The French unemployment rate is almost four times the German rate at ages 18 to 22. This difference declines gradually thereafter to be only 3-5 percent by the late 20s. Entry into the labor force is gradual in France, whereas the education and training system in Germany leads to a steep increase in participation by age 18.59 By age 26, employment and labor force participation are very similar in both countries (Figure 2).60 The same patterns hold by broad education groups (Figures 3 and 4).61 Several things are apparent from the education decomposition. First, those with no vocational and vocational training make up two thirds of the labor force for mature workers. Second, the fraction of workers with no vocational training is much larger in France, but it is falling with age. Third, large changes in the educational composition of the labor force occur in both countries before age 22, and this might affect the aggregate comparison of wage growth.62 Finally, there are no differences between the two countries in unemployment rates for highly educated workers. Differences in unemployment for workers with low and intermediate levels of education are pronounced at younger ages, but they disappear in the late 20s.

Figure 2.
Figure 2.

France: Labor Market Characteristics

Citation: IMF Staff Country Reports 2004, 346; 10.5089/9781451813623.002.A003

Source: IMF staff calculations.
Figure 3.
Figure 3.

France: Labor Force by Education and Age

Citation: IMF Staff Country Reports 2004, 346; 10.5089/9781451813623.002.A003

Source: IMF staff calculations.1/ See definition in Appendix 1.2/ See definition in Appendix 1.
Figure 4.
Figure 4.

France: Unemployment Rates by Education Group and Age

Citation: IMF Staff Country Reports 2004, 346; 10.5089/9781451813623.002.A003

Source: IMF staff calculations.

82. German workers enter the labor force with slightly higher wages than their French counterparts, but French workers catch up quickly and have higher wage growth until age 21 (Figure 5).63 The same pattern holds by education group (Figure 6). While part of the development prior to age 22 is due to patterns of school or training completion, the differences past age 22 may be due to differences in on-the-job human capital accumulation or varying degrees of beneficial job mobility. This issue is discussed in the next section.

Figure 5.
Figure 5.

France: Real Wage Developments.

Citation: IMF Staff Country Reports 2004, 346; 10.5089/9781451813623.002.A003

Source: IMF staff calculations.
Figure 6.
Figure 6.

France: Log Real Hourly Wage-Age Profiles By Education

Citation: IMF Staff Country Reports 2004, 346; 10.5089/9781451813623.002.A003

Source: IMF staff calculations.

C. Sources of Wage Growth and Decomposition of Wages

Theories of wage growth and the role of experience

83. While the descriptive evidence presented in the previous section is suggestive, unemployment and job mobility do not necessarily cause lower wage growth by reducing on-the-job human capital investment. In fact, basic models of wage growth do not give unambiguous predictions regarding the role of training and job mobility.

84. In the basic human capital model by Mincer (1974) and Becker (1964), workers pay for general training they receive on the job by accepting wages lower than their marginal product. Since investments are most profitable early in a worker’s career, the model predicts an increasing and concave wage-experience profile. Those who invest in experience accumulation on the job receive initially a lower wage and then eventually overtake those who do not invest. In the basic human capital model, job mobility neither hurts nor benefits workers. However, the amount of on-the-job human capital investment is proportional to the time spent working, and thus persistent or repeated unemployment could affect wage growth.

85. On the other hand, theories of job matching and job search predict that mobility has a positive effect on wage growth. As workers sequentially search among jobs of different quality and move if they find a better offer than the current, their wages grow at a decreasing rate as they exhaust the set of possible improvements (Burdett, 1978). Search models thus predict concave wage experience profiles, a declining rate of job mobility, and declining gains from job changes.

86. Another line of research studies the impact of minimum wages on training. Predictions are not unequivocal in this case as well. Minimum wages can reduce or increase training. In the standard human capital model, they reduce training if they constrain the ability of the worker to accept lower earnings in exchange for training. For example, in Germany, young workers within the apprenticeship receive wages well below the market wage, implicitly paying for part of the training. However, it also appears that firms in Germany bear part of the cost of training (Bardeleben, Beicht, and Feher 1995).

87. Acemoglu and Pischke (1999), on the other hand, develop a model in which asymmetric information leads to training investments by firms in the presence of minimum wages. If the market has less information about workers ability than the current employer, adverse selection compresses wages in the outside job market. If able workers benefit more from training, then paying for training maximizes firms’ profits. Generally, any form of wage compression could potentially give rise to firm-sponsored training. The firm will train workers until their market wage is exactly equal to the minimum. Since the market is willing to pay only a wage lower than the marginal product for workers of high ability, the firm is able to raise profits by training these workers.64 Interestingly, Acemoglu and Pischke’s model of asymmetric information yields two equilibria—one with high turnover, low training, and low adverse selection, and the other with low turnover, high training, and high adverse selection. It could be that France is in the high turnover, low training equilibrium, whereas Germany is in the high training equilibrium. This has obvious implications for differences in turnover rates and training across countries.

88. What are the implications of these theories for our analysis? If the pure Mincer/Becker model were a good representation of reality, one should observe lower wage-experience profiles in France than in Germany, since young workers spend more time without work and are unable to accumulate human capital. On the other hand, if search models drive the behavior of workers in France, one should observe higher mobility and higher wage growth at job switches in France.

On-the-job versus between-jobs wage growth

89. This section provides an accounting framework for the decomposition of wage growth between on-the-job and between-jobs growth. The components identified in this framework can be used to describe the role of job mobility in explaining differences in wage growth in France and Germany; and they can be related to the main theories of experience accumulation as summarized in the previous section. If the high unemployment rates in France were partly due to short spells of search unemployment, the differences in unemployment rates might be a sign of alternative sources of wage growth. An attempt to reduce unemployment would thus harm young French workers.

90. The difference between average log wages at two ages for workers employed at both ages can be written as:

w(a+1)w(a)[1pm(a)]g5(a)+pm(a)gm(a)(1)

where pm(a) is the fraction of workers changing jobs between age a and a+1, gs(a) is the average wage growth of workers staying at the same job between age a and a+1. gm(a) is the average wage growth of workers moving jobs between age a and a+1.

Job mobility

91. The pattern of job mobility is similar in the two countries (Figure 7), but French workers are more mobile initially. The remaining differences may be due to the timing of secondary schooling as well as the duration of fixed-term contracts.65 While some of the unemployment rate in France at the very beginning of young people’s career may be due to search unemployment, the bulk is likely to be due to institutional features of the educational system and the youth labor market.

Figure 7.
Figure 7.

Annual Job Mobility Rate

Citation: IMF Staff Country Reports 2004, 346; 10.5089/9781451813623.002.A003

Source: IMF staff calculations.
Total wage growth

92. Overall, the biggest wage growth in the two countries occurs at ages 18 to 22 when fixed-term contracts end (Table 2). Then, from age 23 to 26, Germany has higher growth (as a result of higher on-the-job and between-job growth), and from age 27 on, both countries display similar wage growth.

Table 2.

France: Sources of Wage Growth by Age-Group

article image
Notes: Growth rates of real hourly earnings for full-time workers employed in two adjacent years earning more than DM 3 in 1995 prices. Source: IMF staff calculations.Source: Bank of Estonia.

93. Age groups mask important differences (Table 3). France’s growth is much bigger at age 18, while in Germany it is greater from age 21 to 24. This is in line with the staggered pattern of exit from fixed-term and entry into permanent employment. The persistence seems large enough to lead to permanent differences in the wage level. It appears possible that at least part of the differences in levels are driven by differences in human capital (due to experience accumulation). This difference adds to other important factors in explaining cross-country wage differences such as physical capital or technologies.

Table 3.

France: Decomposition of Differences in Annual Wage Growth: France vs. Germany

article image
Notes: Growth rates of real hourly earnings for full-time workers employed in two adjacent years earning more than DM 3 in 1995 prices.Source: IMF staff calculations.
On-the-job wage growth

94. The overall fraction of wage growth explained by on-the-job growth is about two thirds. At the age-group level, the pattern for stayers is very similar across countries but again masks important dynamics at single ages. By single ages, the same pattern holds as for aggregate growth, suggesting differences in gradual entry plus a more persistent differential.

Between-jobs wage growth

95. On average, the fraction of wage growth occurring between jobs is very similar for France and Germany for younger workers, with again a slightly different age pattern consistent with differences in the institutional features of the school-to-work transition (the last column of Table 2 and the first columns of Table 3B show the fraction of growth due to job movers pm(a)gm(a)/g (a)). Interestingly, starting at age 27, the fraction of growth due to between-jobs wage growth falls substantially for France, while remaining much higher in Germany until age 45. This is not what one would have expected if job search were a more important source of wage growth in France.

96. From the analysis, it does not appear that French workers gain overall more by changing jobs in the age range from 20 to 25.66 It is unlikely that the difference is due to varying degrees of selection into mobility, since job mobility is of a similar order of magnitude. Since the decomposition of wage growth in “on-the job” and “between-jobs” growth does not provide conclusive evidence on the importance of search in determining wage growth, the next section suggests a different approach to evaluate the importance of labor force attachment and return to experience in determining wage growth.

Return to experience: counterfactual exercise

97. In this section, we perform a simple counterfactual exercise to obtain a sense of whether low wage growth in France is due to low labor force attachment or due to low returns to experience. If the former held, then a policy designed to reduce unemployment may be optimal. In contrast, if low returns to experience were the reason, further investment in training would be more appropriate.

98. If wages increased due to human capital investments, the gain, g (a), should be a function of labor force attachment, f(a) (it is in this sense that high mobility and inactivity rates may hurt the accumulation of experience) as well as of the return to experience, r(a), i.e.,

g(a)=r(a)f(a)(2)

Given measures of total wage growth and labor force attachment, and ignoring issues of causality, a measure of the ‘true’ return to experience is r (a) = g (a)/ f (a). 67 This measure will be used below to obtain a first assessment of whether differences in wage growth can be explained by differences in experience.68

99. The counterfactual exercise consists of two steps: first, in obtaining a measure of the ‘true’ returns to experience by correcting wage growth for the expected amount of time spent working; second, in applying the French profile of work experience to the German returns and the German experience profile to the French returns. We find that, even if French experience were to be at the German level, wage growth in France would be lower. Similarly, the wage profile would be higher in Germany than in France even if Germans spent the same amount of time in unemployment. In other words, returns to experience appear to be lower in France even adjusting upwards by a measure of actual labor market experience (Figure 8).

Figure 8.
Figure 8.

Simulated On-the-Job-Wage Profiles Accounting for Actual Participation

Citation: IMF Staff Country Reports 2004, 346; 10.5089/9781451813623.002.A003

Source: IMF staff calculations.

100. Ignoring the question regarding causality and taking these returns as the “true” returns to experience, one obtains that the predominant share of differences in on-the-job wage growth is due to differences in returns (80 percent) rather than differences in on-the-job human capital accumulation. Thus, it appears that increasing labor force attachment in France per se would do little to increase wage growth. However, the counterfactual experiment run here are at best indicative, since it is not known whether actual experience really has a causal effect on wage growth.

D. Conclusion

101. Persistently high unemployment rates may have negative effects on workers’ wage growth due to losses in labor market experience, but high unemployment may also be a sign of beneficial job search offsetting these losses. Higher youth unemployment in France does not appear to be the result of higher mobility among jobs induced by search (job changes are as beneficial to wage growth in Germany as in France, suggesting that job search is equally important in both countries). Neither is it evident that the differences in wage growth can be easily rationalized by differences in the degree of labor force attachment. Instead, it seems plausible that lower returns to experience play an important role for lower wage growth in France. Consequently, work experience and stable labor market attachment are only a partial substitute for human capital investment via more formal training, and it is conceivable that some workers in France are undertrained relative to Germany. A comparison of hourly wage profiles suggests that this might be in particular the case for those with vocational and intermediate training. Increased training, with its cost shared between employer and employees, would appear to be a valid avenue to improve the employment experience of low-skilled young workers in France.

APPENDIX I Educational Attainment, Highest Degree Obtained

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56

Prepared by Paola Giuliano (EUR). This paper is a shortened version of a working paper “Does a four-fold unemployment rate make a difference? Wage growth and job mobility of young workers in France and Germany” written jointly with Till von Wachter (Columbia University). It has benefitted from helpful comments of seminar participants at the French Ministry of Finance, the 2004 CEPR/ECB Labour Market Conference, and the European Summer Symposium in Labor Economics (ESSLE 2004).

57

Many papers and much empirical effort have been devoted to explaining the causes of unemployment and its variability across countries and regions (Scarpetta, 1996; Nickell and Layard, 1999; Belot and van Ours, 2000; Blanchard and Wolfers, 2000; and Bertola, Blau, and Kahn, 2002).

58

Lauer (2001) contains a detailed discussion and comparison of the French and German education systems.

59

At around age 21, when most apprenticeships in Germany have ended, participation rates drop slightly. This dip is partly due to a drop in the participation rate of men exiting the labor force to attend military or civil service.

60

This pattern of labor force participation could imply the existence of a selection problem: the group of French workers participating in the labor force prior to age 26 could be less educated than their German counterparts if more able workers stayed in school longer to avoid unemployment. While this could explain part of the differences in unemployment rates, selection cannot explain persistent differences in real wages (if more educated people in France enter the labor market later than in Germany, we should observe a decline in unemployment and an increase in wages after their entry; we observe the former, but not the latter).

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Education levels are defined in the Appendix.

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For example, part of the difference in wage growth might reflect the divergence in the fraction of workers with vocational training up to age 22.

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Figure 4 shows the average log hourly real wage in 1995 prices by age in France and Germany. The French wage series has been converted to German DM by applying 1995 nominal exchange rates. The average is taken over all individuals reporting at least 30 usual hours worked per week and earning at least DM 3 per hour. In the Mikrozensus, workers report net monthly income in brackets, and we take the average of the midpoint of the brackets divided by usual weekly hours rescaled to a monthly figure. For the Enquéte Emploi, we can use a continuous measure of net monthly earnings. The difference-in-earnings concepts does not affect our results, since very few young workers have additional sources of income.

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Note that firms will only pay for training if it raises workers’ productivity more for more able workers. If all workers would benefit equally from training, this would be incorporated fully in the market wage even under adverse selection. If low ability workers gain less from training, the market will undervalue the effect of training for high ability workers, since due to adverse selection, the sample of workers looking for jobs is over-proportionately composed of less able workers. Of course, it is crucial that only the training firm, not the market, can observe workers’ abilities.

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Preliminary tabulations suggest that fixed-term contracts cover about 75 percent of workers among French at age 18 or earlier, the rate falling steeply between age 18 and 20. In Germany, the initial rate is 85 percent and also falls rapidly but with a two year lag with respect to the French.

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Panel C of Table 3 shows a simple shift-share decomposition of the differences in growth rates between France and Germany. Taking the difference across countries of Equation (1), one obtains a shift-share decomposition of differences in growth rates of the form: Δw(a)FΔw(a)G=Δgs(a)[1pmF(a)]+Δgm(a)pmF(a)+Δpm(a)[gm,G(a)gs,G(a)] where the first two components capture the weighted differences in growth on-the-job and between-jobs, and the last components captures the effect of differences in mobility rates. The last columns of the tables display the fractions of the difference in total growth explained by either component. From the shift-share decomposition, it appears that differences in the wage growth of stayers explain about 60 percent of aggregate wage differences between French and German young workers in the early 20s. The remaining difference is explained by the wage growth of movers.

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This ignores gains due to job mobility. Since this has been shown to be important in previous paragraphs, this measure will thus overstate the returns to experience.

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Without longitudinal information on workers’ job histories, this calculation can only be implemented at the group level by imputing experience for each group g at age a using a measure of aggregate labor force attachment. A natural measure of labor force attachment would be the employment rate for a given group g at age a. If actual labor force participation of a worker is measured as the number of days in a given year, then the average of this measure at the group level is the sum of the group’s employment rates at each day within a year. If one is willing to approximate the daily employment rate with the annual average, then the average level of a group’s actual experience can be approximated by 365 times the group’s employment rate at a given age.

France: Selected Issues
Author: International Monetary Fund