France: Selected Issues


France: Selected Issues

II. Labor Market Reform1

Institutional rigidities have contributed to the persistence of low employment rates and high unemployment in the wake of the crisis. Recent reforms have reduced the labor tax wedge but important challenges remain in a number of areas—including the minimum wage, job search incentives, and enterprise-level flexibility in wage negotiations.

A. France’s Labor Market

1. High structural unemployment. Notwithstanding recent reforms and economic recovery, high unemployment is projected to persist over the medium term. Weak economic growth during the crisis years, in combination with long-standing labor market rigidities, has hampered job creation and pushed unemployment to 10.5 percent in April 2015,2 up from a trough of 7.5 percent in 2008. Structural unemployment has increased steadily since the onset of the crisis, and about two in five unemployed are now out of work for over a year. Employment rates have remained below those in many peer countries. Even with the sustained recovery projected under baseline assumptions, the unemployment rate would decline only very gradually, reaching 9 percent in 2020.


France: Labor Market Key Indicators

Citation: IMF Staff Country Reports 2015, 179; 10.5089/9781513519579.002.A002

Sources: OECD, Haver Analytics, and IMF Staff calculations.

2. Segmentation. The labor market remains segmented. Youth unemployment stands at around 24 percent, and more than 20 percent of 20-29 year olds are neither in employment nor education. Uncertainty surrounding the pace and strength of recovery, coupled with judicial constraints around dismissals, have contributed to labor market duality, with 55 percent of workers below 25 being hired on a fixed-term contract and 85 percent of all new contracts being fixed term, most with very short durations. The unemployment rate among the low skilled increased fast throughout the crisis, and came to almost three times that of skilled workers in 2012. There is also evidence that people with an immigration background find it particularly difficult to enter the labor market (CEPREMAP, Edo and Jacquemet, 2014).


France: Labor Market Segmentation

Citation: IMF Staff Country Reports 2015, 179; 10.5089/9781513519579.002.A002

Sources: INSEE and IMF Staff calculations.

3. Labor costs. Real wages have continued to grow despite high and rising unemployment (see panel chart). Since the onset of the crisis, basic monthly salaries have grown steadily at around 2.1 percent per year, and real wages have increased cumulatively by 4.6 percent despite a 3 percentage point increase in the unemployment rate and cumulative GDP per capita loss of 0.8 percent. Labor costs have moderated somewhat, partly as a result of payroll tax reductions, and the authorities have advanced wage containment measures (a public service wage-scale freeze since 2010 and no discretionary increases in the minimum wage above formula since 2012).

4. Productivity link. France’s steadily rising labor force requires strong employment growth to gradually reduce the unemployment rate. In particular, it would require significant job creation for the low skilled. Since the currently high level of labor productivity in France partly reflects the large employment gap between skilled and low-skilled workers, in contrast for example to Germany, the challenge will be to reduce unemployment while taking steps to preserve or improve productivity growth by building human capital.


Real GDP per Capita Components, 2014

Citation: IMF Staff Country Reports 2015, 179; 10.5089/9781513519579.002.A002

B. Rigidities

5. Causes. The literature points to a broad range of institutional factors that contribute to wage rigidity and structural unemployment in France.3 These include a high minimum wage, the labor tax wedge, costly and uncertain dismissal procedures, restrictions on firm-level bargaining, skill mismatches and inadequate training programs to address them, and unemployment and social benefits with insufficient job search incentives.4 While the exact contribution of each of these factors to suboptimal labor market outcomes is difficult to estimate, a decisive reduction in structural unemployment would likely require a multi-pronged approach to labor market reform.

6. Minimum wage. In France, the minimum wage has long been an important social and political symbol. It plays a major role in the wage formation process and guarantees a basic living income for working people.

  • Level. By 2013, France’s labor costs at the minimum wage level were high by international comparison. The minimum wage has risen by 44 percent since 2001, including by 14 percent since 2007 (compared to 12 percent nominal GDP growth). France’s minimum wage, relative to the median wage, is the highest among euro area countries, implying a significant degree of wage compression and discouraging employment of low-skilled workers (OECD, 2013 and 2015).

  • Tax wedge. A string of reforms sought to alleviate the labor cost effects from the minimum wage, in particular by reducing the tax wedge for lower salary ranges. These efforts span from the Balladur and Juppé reforms in the 1990s through the Aubry and Fillon tax breaks in the 2000s to the more recent tax cuts introduced by the CICE tax credit and the Responsibility and Solidarity Pact (estimated at EUR 30 billion over 2013-17). Although these measures have borne fruit (see, for a review, Nouveau and Ourliac, 2012), the gap between unskilled and skilled unemployment rates has continued to increase, and the total labor costs for employer at the minimum wage level in France remained among the highest in the OECD in 2013.5

  • Wage feedback loop. The automatic formula-based increases in the minimum wage, combined with the related broader wage bargaining process (see below), create a feedback loop that contributes to broader wage rigidity.6 Minimum wage policy dominates wage formation for up to around the 45 percentile of the wage distribution (Aeberhardt and others, 2012; Goarant and Muller, 2012). As the minimum wage acts as a floor for pay grades, partial indexation of the minimum wage to increases in average real wage creates a feedback loop pushing up wages throughout the economy (Cette, 2012).


Labor Costs at the Minimum Wage Level

Citation: IMF Staff Country Reports 2015, 179; 10.5089/9781513519579.002.A002

Sources: Nouveau and Ourliac (2012); and OECD, FOCUS on Minimum wages after the crisis: Making them pay (May 2015).* Minimum wage level in Germany is for 2015.

7. Dismissals. Costly and uncertain dismissal procedures have discouraged hiring into permanent jobs, contributing to labor market duality. France’s employment protection legislation requires strong justification for any dismissals. Unjustified dismissals are subject to labor court review that can improve on the worker’s separation package. Labor courts deliberations can be very slow, their prescribed conciliatory procedures are often ineffective, decisions are frequently subject to appeal, and jurisprudence across tribunals varies widely (National Reform Program, 2015). This system encourages the use of fixed-term contracts, where termination cost is set at 10 percent of the total gross pay since the beginning of the contract.7 It also has led to the reliance on the so-called rupture conventionnelle, introduced in 2008, which allows for voluntary separation from employment leading to formula-based termination compensation.

8. Wage bargaining. At the enterprise level, there are limits on social partners’ flexibility to agree on hours and wages. According to the labor code, company-level agreements must either match or improve upon the salary and job classifications embedded in the branch-level collective agreements. In this context, mandatory annual wage negotiations for medium and large companies, coupled with high dismissal costs, create pressure for wage increases even when productivity gains are tepid (Enderlein and Pisani-Ferry, 2014). On average over 2008–14, wages negotiated at the firm level increased by 1 percentage point above the rise in the minimum wage.

9. Training and education. The literature suggests that structural unemployment often reflects skill mismatches induced by structural change (see, for example, Ljunqvist and Sargent, 1998). Young people entering the labor market may not have the skills most in demand, while long-term unemployed can progressively lose skills acquired in previous job. Vocational education and professional training could facilitate rapid reintegration of unemployed in the labor force. There is some evidence that these factors play a role in France. Each year, 140,000 young people leave the education system without completing school. The professional training system, which costs about 1.4 percent of GDP, has been slow to respond to the needs of job seekers. Its resources are often managed by social partners or at local government level and not targeted to the low skilled, the unemployed, and those most in need of training. Moreover, in contrast for example to Germany, most young people in professional education are not employed or in apprenticeships.

10. Benefits. Eligibility conditions for unemployment benefits are comparatively lenient while payouts are generous (Europ’Info, 2012). Workers become eligible for unemployment benefits after only 4 months of service (the shortest time to reach eligibility in Europe) and qualify for up to 24 months of benefits after working for just 2 years (the fastest among the largest European countries). While the replacement rate is broadly on a par with other European countries, the maximum monthly benefit is capped at about €7,000, well above peers. In the first year of unemployment, the salary of a “reasonable job offer” that the unemployed should accept is set as high as 85–100 percent of the previous salary. Moreover, the unemployed can reject the first such offer without penalties. The system also does not provide for a progressive reduction in benefits (degressivity) for long-term unemployed to encourage their rapid return to the labor market. While benefit recipients are required to conduct an active job search, this condition is not always strictly enforced for either welfare or unemployment benefits.

C. The Reform Agenda

11. Recent reforms. In the early 2000s, strong economic growth combined with labor subsidies supported solid employment creation (1.2 percent on average over 2001–07). This coincided with the gradual introduction of the 35-hour workweek starting in 2000, whose impact is still debated—some studies show that it had barely any impact on job creation while raising labor costs for firms (Saint Paul, G., 2015; Cahuc, 2001), while others find positive employment effects from the reduced working week (Fiole and Roger, 2002, Askenazy, 2013). This partly motivated the Aubry and Fillon cuts in social security contributions for unskilled workers (Nouveau, C. and B, Ourliac, 2012. Since the onset of the crisis and the resulting stagnation in employment growth (0.1 percent on average over 2008-14) and marked increase in unemployment, a number of steps have been taken to improve the functioning of the labor market. Key labor market policies have included:

  • The Job Security Act adopted in 2013 opened the door to a more collaborative relation between social partners and represented a first step toward “flexicurity” (Table 1). In particular, so-called “job preservation agreements” (accords de maintien de l’emploi) introduced in mid-2013 allowed companies in severe economic difficulty to renegotiate wages, employment, and working time for up to two years. However, the conditions of such agreements have proved restrictive, and only about a dozen of them were negotiated in two years.

  • Recent reforms have attempted to contain labor costs directly (CICE and Responsibility Pact). While their impact on employment could be potentially significant, they are fiscally costly and estimates of their positive effects on employment are highly sensitive to assumptions (Espinoza and Pérez Ruiz, 2014). Moreover, the effectiveness of these measures appears to be lower than similar measures adopted in the past, partly because recent schemes are less targeted to low wages than past measures owing to other considerations that went into their design, such as ensuring that the tax cuts also benefit exporting firms that tend to employ skilled labor.

  • To encourage labor mobility and employability of the most vulnerable workers, the 2014 reform introduced personal “training accounts” transferable across jobs and between employment and unemployment. Prior to the reform, the training rights acquired in one job were not easily transferred, leading to training mostly benefitting those already in permanent jobs rather than temporary workers or job seekers.

  • The 2014 reform of the unemployment insurance system also introduced “rechargeable” unemployment benefits rights, whereby employees are allowed to carry their accrued rights to another job and from an unemployment situation to a job, effectively improving job search incentives.

  • In May 2015, the employment agency announced deployment of nearly 200 inspectors in the coming months to verify and enforce job search requirements for the registered unemployed.

Table 1.

Key Labor Market Reforms

article image
Sources: OECD, G 20 commitments, Programme National de Reforme 2015, Enderlein and Pisany-Ferry report, and the Jobs Act à la française.
Figure 1.
Figure 1.

Labor Market Structural Indicators

Citation: IMF Staff Country Reports 2015, 179; 10.5089/9781513519579.002.A002

Sources: OECD and IMF Staff calculations.1/ Index ranging from 1 to 7, based on a question posed to 14 000 business leaders (of which 129 in France), with 7 indicating the greatest possible level of co-operation.2/ Entitlement and activation index from 1 to 5, where 1 is less strict (left scale). Duration is equal to months of benefits for an unemployed worker with 22 years of contributions (right scale). Degressivity is equal average net replacement rate in years 2 to 5 as percent of net replacement rate in year 1 (right scale).

12. Reforms underway. The government is pursuing additional reforms on a number of fronts. The Macron law foresees a reform of the prud’hommes system aimed at reducing judicial uncertainty around individual dismissals. The draft Rebsamen law, aimed at improving the social dialogue, would streamline mandatory discussions between social partners in SMEs. In early June, the government announced a package (to be adopted over 2015–16) to promote employment by removing obstacles to job creation most constraining to SMEs. Labor market reforms include measures to: (i) facilitate “job preservation agreements” by extending their duration from two to five years, introducing fast-track dismissal procedures for workers that do not endorse the agreement, and providing for its possible suspension if the firms’ situation changes; (ii) cap severance payments that can be awarded by labor courts in regular dismissal cases; (iii) increase to two the number of authorized renewals for fixed-term contracts (now they can only be extended once); (iv) increase by 40,000 the training slots aligned with company needs (adding to the 60,000 slots created in mid-2014); (v) grant a subsidy of up to EUR 4,000 for micro companies recruiting their very first employee for one year and over; and (vi) extend the trial period of apprenticeships contracts by counting towards it only the days of actual work in the company.

13. Further reform options. While the distortions underlying high unemployment and labor market segmentation are well established, it is less obvious what impact individual piecemeal reforms may have, in part because of synergies among them and with other structural reforms. This has prompted calls for a comprehensive employment overhaul (for example, see the Jobs Acts à la française advanced by a group of French economists, Box 1). The comprehensive reform proposals center on (i) better aligning wages to productivity developments and employment conditions (in particular for low-skilled workers); (ii) using job preservation agreements preemptively (for example, by expanding their eligibility to companies facing challenging competition in the market, accords offensifs) and decentralizing the wage bargaining process with greater recourse to the special relief clauses in branch collective agreements; (iii) boosting job search incentives for benefit recipients; (iv) improving the efficiency of vocational training (Enderlein and Pisany-Ferry, 2014, Tirole and others, 2014); and (v) reducing duality by increasing flexibility of open-ended contracts. One proposal addressing labor market duality contemplated introducing a single open-ended contract with the same termination procedures applicable to all contracts (Blanchard and Tirole, 2003), and with compensation for layoffs being calculated according to a rate setting mechanism based on seniority.8

Towards a Jobs Act à la Française

A group of French economists led by Nobel Laureate Jean Tirole has recently called for a comprehensive Jobs Act to combat unemployment, which would include four pillars:

  • An upgraded occupational training system that would certify training for those seeking employment.

  • A reform of the unemployment insurance to encourage job seekers to take up employment offers and to link firms’ unemployment contributions to the total wage bill and a regressive factor to incentivize employment (“bonus-malus” or “tax dismissal” system).

  • Further reduction in labor costs at low wages by targeting existing labor tax cuts around the minimum wage.

  • Lower uncertainty on dismissals by broadening the definition of acceptable economic reasons for redundancy. This would allow firms to dismiss employees not only when they are in difficulty (economic redundancy) but also for those firms who would like to improve their competitiveness.


  • Aeberhardt, R., P. Givord, and C. Marbot, 2012, “Spillover Effect of the Minimum Wage in France: An Unconditional Quantile Regression Approach”, INSEE Document de Travail G2012/07.

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  • Askenazy, 2013, “Working time regulation in France from 1996 to 2012,Cambridge Journal of Economics, Oxford University Press, vol. 37(2), pages 322347.

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  • Askenazy, Philippe, The Blind Decades: Employment and Growth in France, 1974-2014, Oakland, University of California Press, 2014.

  • Askenazy, P., Bozio, A., and C. García-Peñalosa, 2013, “Dynamique des salaries par temps de crise,les notes du conseil d’analyse économique, avril, 2015.

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  • Askenazy, Philippe, The Blind Decades: Employment and Growth in France, 1974-2014, Oakland, University of California Press, 2014

  • Blanchard, O., and J. Tirole, 2003, “Contours of Employment Protection Reform,Working paper, Massachusetts Institute of Technology. Dept. of Economics, no. 03-35.

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  • Cahuc, P., M. Ferracci, J. Tirole, and E. Wasmerd, 2014, “L’apprentissage au service de l’emploi,Les notes du conseil d’analyse économique, n° 19, décembre 2014

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  • Cette, G., Chouard, V., and G. Verdugo, 2012, “Les effets des hausses du SMIC sur le salaire moyen,Banque de France, Document de travail 366.

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  • Edo., A., and N. Jacquemet, 2014. “Discrimination à l’embauche selon l’origine et le genre: défiance indifférenciée ou ciblée sur certains groupes ?,PSE - Labex “OSE-Ouvrir la Science Economique”

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  • Enderlein, H., and J. Pisany-Ferry, 2014, “Reforms, Investment, and Growth: An Agenda for France, Germany and Europe”, Report to S. Gabriel and E. Macron.

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  • Espinoza R. and E. Pérez Ruiz, 2014, “Labor Tax Cuts and Employment: A General Equilibrium Approach for France,IMF WP 14/114, Washington DC: International Monetary Fund.

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  • Europ’Info, 2012, “L’assurance chômage en Europe,Unédic, July 2012.

  • Goarant, C., and L. Muller,Les effets des hausses du Smic sur les salaires mensuels dans les entreprises de 10 salariés ou plus de 2006 à 2009,Dossier - Les effets des hausses du Smic sur les salaires mensuels.

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  • Ljungqvist, L. and T. Sargent, 1998, “The European Unemployment Dilemma,Journal of Political Economy, Vol. 106, No. 3 (June 1998)

  • Nouveau, C. and B, Ourliac, 2012, “Les allègements de cotisations sociales patronales sur les bas salaires en France de 1993 à 2007,Documents d’Etude, DARES 169/2012.

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  • OECD Economic Surveys, France, March 2013.

  • Programme National de Reforme, 2015, Direction générale du Trésor, French Ministry of the Economy, Finance, and Industry.

  • Saint Paul, G., 2015: “35 heures, 15 ans déjà: la France 2015 face au bilan des années JospinAtlantico, February, 2015.


Prepared by Esther Pérez-Ruiz and Michael Gorbanyov (both EUR).


Harmonized unemployment rate, Eurostat.


See for example, Thomas Philippon, 2007. Le Capitalisme d’héritiers: La crise française du travail, Paris.


In addition, a Banque de France study points to a link between housing-related costs of living and wage pressures (Carluccio, 2014).


The minimum wage is uniform across regions, professions and skill levels, with a small reduction of 10-20 percent for inexperienced young people under the age of 18.


Each year, the minimum wage is automatically indexed to inflation and half of the average real wage increase in the economy. To this, the government can add a discretionary increase (coup de pouce), last applied in 2012.


Out of 4.6 million temporary private contracts that were concluded in the first trimester of 2014, 3.8 million were for less than a month, and most for less than eight days (Askenazy 2014). Very short contracts are widely used in some sectors as successive renewals are unconstrained unlike for fixed term contracts.


Lepage-Saucier and others (2013) nevertheless estimate high temporary employment costs from implementing a single labor contract in France.

France: Selected Issues
Author: International Monetary Fund. European Dept.