Abstract
This Selected Issues paper examines the causes and potential remedies for structural unemployment in France. Structural unemployment in France has long been elevated, and appears to have edged up further since the crisis. This reflects both demand and supply factors, including: high labor taxes, wage stickiness, a growing skill gap, hysteresis effects from the crisis years, a lengthy period of elevated economic uncertainty, inactivity traps created by the unemployment and welfare benefit systems, and demographic factors that have pushed up the labor force. The cyclical recovery is projected to bring down the unemployment rate only slowly. Reducing labor tax wedges can increase both output and employment.
Structural Unemployment—Causes and Potential Remedies
Structural unemployment in France has long been elevated, and appears to have edged up further since the crisis. This reflects both demand and supply factors, including: high labor taxes, wage stickiness, a growing skill gap, hysteresis effects from the crisis years, a lengthy period of elevated economic uncertainty, inactivity traps created by the unemployment and welfare benefit systems, and demographic factors that have pushed up the labor force. The cyclical recovery is projected to bring down the unemployment rate only slowly, and the NAIRU is estimated to remain above 8 percent over the medium term. We investigate the structural causes of unemployment and potential remedies.
Reducing labor tax wedges can increase both output and employment. In France, CICE, PRS and other recent reforms have reduced the labor tax wedge for the low-paid workers. The wedge remains elevated for middle and upper incomes, but further reductions would require difficult policy trade-offs given the high level of public spending.
Strictness of employment protection in France is above the EU average. Labor arbitration procedures are cumbersome and allow making an appeal for a very long time after dismissal, which adds to uncertainty for companies. Reforms easing dismissal regulations could have a sizable positive impact on output and employment when economic conditions are strong. Early studies suggest that the proposed “El Khomri” law, by reducing judicial uncertainty around dismissals, could have a moderate impact on overall unemployment, while stimulating hiring on open-ended (CDI) contracts as opposed to temporary recruitment (on CDD).
Efficiency of collective bargaining depends on flexibility at the firm level, the reach of sector-level agreements, and the effectiveness of coordination among agents. IMF research suggests that France can be classified among countries with “low trust” and “some coordination”, which entails poor unemployment outcome. In France, trade unions play a leading role in collective negotiations even though membership is low. The El Khomri law would extend the scope for firm-level collective agreements.
While the replacement rate of unemployment benefits in France is broadly in line with other countries, eligibility criteria are relatively lax, with rapid qualification and accumulation of benefit rights, and weak job search requirements. Moreover, specificities of the benefit formula create incentives for alternating between ultra-short contracts and unemployment periods.
The ratio of minimum to median wage in France is among the highest in the OECD, which may adversely affect job market chances for the young, the low-skilled, and the long-term unemployed. Its automatic annual adjustment can contribute to wage stickiness.
A. What Keeps France’s Unemployment High?1
Before and After the Crisis
1. Unemployment has been elevated for decades, and moved relatively little across the business cycle. The unemployment rate has averaged around 9 percent since 1990, remaining well above rates seen in Germany, the UK, and the United States (and broadly similar to Italy) both before and after the global financial crisis. While the French employment rate is relatively high for prime-age workers (around 80 percent), it has been below several peer countries for the full-age spectrum (around 65 percent versus an average of about 70 in Germany, the UK, and the US).
2. The 2008/9 and 2011/12 crises pushed up unemployment by more than two percentage points while labor force participation remained steady. The jobless rate increased by less than in the United States at the peak of the 2008/9 crisis, but more than in Germany despite similar declines in GDP in these countries, partly reflecting differences in labor hoarding at the height of the global financial crisis. France’s unemployment increased again when the euro area downturn intensified in 2011/12. Throughout this period, France’s employment rate remained very stable, in contrast to the United States, where it fell significantly and Germany where it continued to rise.
Employment and Unemployment, Ages 15–64
(Percent; shading indicates recessions based on real GDP)
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Sources: Haver Analytics and IMF Staff calculations.France Real Growth and Unemployment
(Percent, 3-month moving average)
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Sources: Haver Analytics and IMF Staff calculations.3. The employment response to the most recent recovery has been muted, though recent labor tax cuts may be starting to show effects. The current recovery started in the second quarter of 2013, but the unemployment rate remained stubbornly high at just over 10 percent through the first quarter of 2016 notwithstanding considerable public sector hiring. The muted jobs response is not unusual for France—following recessions, unemployment generally remained high for a number of years into the recovery. However, the employment response has been at the low end of past recoveries and below several peer countries. The most recent data indicate some progress on private sector job creation, which may have been supported by a significant slowdown in unit labor costs relative to the EU average thanks to a moderation of wage growth coupled with increases in labor productivity, and labor tax wedge cuts.2
4. Unemployment is particularly severe for the young, the low-skilled, and immigrants. Job losses and lack of job growth affect some groups more severely (Figure 2). In particular:
Age. The jobless rate is particularly high among the young and has been rising since 2008–09. One in four young French are unemployed (compared to one out of seven in the UK and one in fourteen in Germany), and about one in six of them are neither in employment nor in training or education (compared to one out of eight in the UK and one out of sixteen in Germany). Older French workers also face higher unemployment and long-term unemployment as well as lower employment rates than their prime-age peers in France, or in Germany or in the United Kingdom. Since 2008–09, unemployment for the 50+ has grown (around 2 percentage points reaching 7 percent) and has become almost a fifth of total unemployment, compared to a seventh when the crisis hit. Youth (15–24) and older-age unemployment (55–74) each contribute about 2 percentage points each to the overall unemployment rate. Among young and older unemployed, about a third, respectively, are low-skilled.
Skills. The unemployment rate among the low-skilled has risen by over 50 percent since 2008–09, reaching 18 percent—a rate around 50 percent higher than Germany’s and the UK’s. The low-skilled are also the least likely to participate in the labor market, displaying a higher inactivity rate than peers in the EU15 on average (although in France, at 13 and 26 percent of the working age population in 2015 inactivity is also higher for the medium and high-skilled in relation to the EU-15 average, standing at 12 and 23 percent, respectively). The low-skilled contribute about 3 percentage points to the overall unemployment rate, and account for more than half all inactive working age persons.
Country of birth/citizenship. First generation EU28 immigrants working in France are twice as likely to be unemployed relative to workers born in the EU28. Immigrants contribute about one percentage point to the overall unemployment rate.
Weak Labor Market Performance Since the Crisis
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Sources: Haver Analytics and IMF staff calculations.Vulnerable Groups
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Sources: EuroStat and IMF staff calculations.High Structural Unemployment
5. Most of France’s unemployment appears to be structural. The persistence of high unemployment over several decades and through various economic cycles suggests that France’s unemployment is more of a structural phenomenon than a cyclical one. Staff’s multivariate filter estimates show that the NAIRU has long been elevated in France—averaging around 8⅔ percent between 1980 and 2007. Staff’s estimates are below those of structural unemployment by the European Commission of over 10 percent. Estimates of the “Okun law” over a pre- and a post-crisis sample show that unemployment has moved somewhat less strongly with output in recent years, but still more than in Germany.3
The NAIRU, Long-Term Unemployment and Okun’s Law
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Sources: OECD and IMF staff calculations.6. The rising number of long-term unemployed points to a further worsening of structural unemployment. Between mid-2008 and early 2016 the number of job-seekers at the Pole d’Emploi in Categories A, B and C registered for a period between 1 and 3 years had increased by 135 percent (reaching about 1.7 million), while the number of those registered for a period longer than 3 years had doubled over the same period (reaching about 0.8 million). As a result, by the end of 2016:Q1, long-term unemployment (more than 12 months) hit the historical record of 2.5 million—43 percent of total unemployment. Alongside, the very long-term unemployment rate (more than 24 months) almost doubled since the crisis, to 2.2 percent of the labor force. These rates are comparable to the EU28 average, but are well above Germany and the United Kingdom.4
Possible Causes of Structural Unemployment
7. The severity of the global and euro area crises has likely created hysteresis effects in France. Prolonged or double-dip recessions can create vicious cycles: the longer a worker is unemployed, the harder it is to find a job, given deteriorating professional networks and the perception of eroding skills. As explained by Blanchard and Summers (1986), such “hysteresis” effects mean that the natural rate of unemployment can be influenced by the path of actual unemployment. Following Ball (2009), we regressed staff’s estimate of France’s NAIRU on a lag of itself and a lag of unemployment, restricting the coefficients to sum to one.5 Results obtained using recursive estimates show that the coefficient estimated on a one-year lag of actual unemployment in a regression explaining structural unemployment has gone up since 2009. This suggests that, other things equal, the NAIRU has been pulled toward actual unemployment and the pool of structurally-unemployed is larger today than it was before the crisis.6
8. Higher economic uncertainty since the crisis may have affected the way in which French firms adjust their demand for labor, possibly depressing hiring during the recovery.7 As shown above, France’s Okun relationship between output and unemployment may have weakened moderately since the crisis. Increased economic uncertainty may be a factor, with firms reducing hours per worker more in the downturn and conversely increasing hours more in the recovery, thus limiting fluctuations in the demand for workers and unemployment, see for example Jadeau et al. (2015). 8 While economic uncertainty also increased in other countries that did not see a similar persistence of unemployment post crisis, this may partly reflect the less flexible labor market regulations in France including judicial uncertainty around dismissals (see next section).
9. Skill mismatch is a longstanding issue, and may have worsened. France’s “Beveridge curve”9—the (normally negative) relationship between vacancies and unemployment—appears to have shifted outward since the crisis, pointing to a possible deterioration in matching efficiency. Unemployment has been growing, while the job vacancy rate has remained broadly stable rather than declining—a result corroborated by estimates in Maravalle et al. (2014). The decline in matching efficiency may reflect a growing skill gap between education outcomes and labor demand. While the share of low-skilled people among the active population has declined between 2006 and 2015 (from 28 to 17 percent of the youth active population, approximately), young adults (25 to 34 years old) who have not completed their upper secondary studies were hit harder by the crisis than older adults with the same educational attainment and by peers in the OECD. Moreover, both PISA and PIAAC educational surveys point to France’s relative underperformance among the young with secondary education. There is also evidence of more rapid obsolescence of skills among all age groups after initial education, partly owing to less training of the active population compared to the OECD average (France Strategie, 2016).
10. The steady growth in the labor force has also affected unemployment outcomes. France’s labor force has grown on average 0.7 percent per year between 2007–15, even faster than the 0.4 percent in the growth of the working age population over that period. While this is a positive development to the extent that it reflects higher female labor force participation and a rising retirement age,10 it also means that structural impediments in the labor and product markets can make it difficult to create an equivalent number of jobs. Most strikingly, France’s labor force increased by almost 2 percent in the crisis years from 2008 to 2012. By contrast, in the United States and Germany, a considerable number of persons dropped out of the labor force, reducing it by ½ percent in the US and by 1½ percent in Germany. This may help explain some of France’s relative underperformance in terms of changes in the unemployment rate (as opposed to employment, where differences were less pronounced).
Labor Force and Unemployment Rate
(Index, 2008 = 100; right scale in percent)
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Sources: OECD and IMF Staff calculations.Hysteresis, Matching Efficiency, Wage Responsiveness and Skills Mismatch
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Sources: Haver Analytics, OECD, and IMF staff calculations.Demographics and Wage Developments
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Sources: Haver Analytics, EuroStat, OECD, and IMF staff calculations.11. Wage stickiness may have contributed to structural unemployment, in particular in the years before the crisis. The introduction of a 35-hours week at the beginning of last decade was not accompanied by a reduction in the minimum wage, which plays an important role in France’s wage dynamics. Combined with a relatively rigid wage bargaining system (see next section), this may have led to a loss of competitiveness since 2000 and to a slower reactivity of wages to the unemployment rate, as reflected in the sizeable flattening of the Phillips curve since the early 2000s. Both base and average wages have continued to trend above the EU average since 2008, although recently, labor cost competitiveness has improved thanks to the depreciation of the euro and the introduction of labor tax wedge cuts targeted at lower wages. Over the same period, minimum wages (which are indexed to a formula above inflation) have increased less rapidly than in the past.11
12. Certain features of the unemployment insurance system appear to have induced inactivity traps and a decline in the length of fixed-term contracts (see next section). The share of fixed-term contracts (contrat a durée determine, “CDD”) to total contracts has gradually increased, to about 11½ percent, and CDDs lasting less than a month have more than doubled between 2000 and 2014, as employers and employees opted for the greater flexibility offered by alternating short-term work contracts and short periods of unemployment benefits. This behavior has become widespread, with about 0.6 million workers intermittently in and out of registered unemployment, boosting unemployment.
B. Labor Market Reform Challenges12
Building on cross-country comparisons and literature recommendations, this chapter identifies the features of the French labor market framework that differ most significantly from that of peer countries. It covers labor tax wedge, employment protection, collective bargaining, unemployment benefits, and the minimum wage setting mechanism.
Labor Market Reforms in Various Phases of the Business Cycle
13. The literature suggests that structural reforms can be beneficial for jobs and growth. Well-designed reforms can lift potential output over the medium term while also strengthening aggregate demand in the near term by raising consumer and business confidence (IMF April 2016 WEO, Chapter 3). In advanced countries such as France reform efforts have involved:
Deregulating retail trade, professional services, and certain segments of network industries, primarily by reducing barriers to entry (as it was initiated in France by the Macron law);
Increasing the ability of and incentives for the unemployed to find jobs, by boosting resources for and efficiency of active labor market policies, and reducing the level or duration of unemployment benefits where these are particularly high;
Lowering the costs of and simplifying the procedures for hiring and dismissing regular (that is, permanent) workers (as envisaged in the El Khomri law) and harmonizing employment protection legislation for both regular and temporary workers;
Improving collective-bargaining frameworks in instances in which they have struggled to deliver high and stable employment (Rebsamen law and El Khomri law);
Cutting the labor tax wedge—that is, the difference between the labor cost to the employer and the worker’s net take-home pay (Pacte de responsabilité et de solidarité and CICE);
Implementing targeted policies to boost participation of underrepresented groups in the labor market, including youth, women, migrants, and older workers.
14. Labor market reforms can raise output and employment over the medium term, while their short-term payoff depends on types of reforms and phase of the business cycle. Reductions in labor tax wedges and increases in public spending on active labor market policies tend to have larger effects during periods of economic slack, in part because they usually entail some degree of fiscal stimulus. In contrast, reforms to employment protection arrangements and unemployment benefit systems have positive effects in good times, but can become contractionary in periods of slack. Meanwhile, product market reforms can deliver quick gains under broad range of macroeconomic conditions (Table 1).
Effect of Product and Labor Market Reforms on Macroeconomic Outcomes
Effect of Product and Labor Market Reforms on Macroeconomic Outcomes
| Area of Reforms | Normal Economic Conditions | Weak Economic Conditions | Strong Economic Conditions | |||
|---|---|---|---|---|---|---|
| Short Term | Medium Term | Short Term | Medium Term | Short Term | Medium Term | |
| Product Market | + | ++ | + | + | ++ | |
| Employment Protections Legislation | − | −- | + | ++ | ||
| Unemployment Benefits | + | ++ | − | + | ++ | |
| Labor Tax Wedge | ++ | ++ | ++ | ++ | ||
| Active Labor Market Policies | ++ | ++ | ++ | ++ | ||
Effect of Product and Labor Market Reforms on Macroeconomic Outcomes
| Area of Reforms | Normal Economic Conditions | Weak Economic Conditions | Strong Economic Conditions | |||
|---|---|---|---|---|---|---|
| Short Term | Medium Term | Short Term | Medium Term | Short Term | Medium Term | |
| Product Market | + | ++ | + | + | ++ | |
| Employment Protections Legislation | − | −- | + | ++ | ||
| Unemployment Benefits | + | ++ | − | + | ++ | |
| Labor Tax Wedge | ++ | ++ | ++ | ++ | ||
| Active Labor Market Policies | ++ | ++ | ++ | ++ | ||
15. In the current environment of modest growth in France and many other advanced economies, prioritization and sequencing of reforms can be an important consideration. Generally, for countries with significant output gaps, reforms that entail some fiscal stimulus will be the most effective—for instance cuts in labor tax wedges and public spending on active labor market policies. For countries with limited fiscal space, such measures can still be considered when implemented in a budget-neutral way, for example, as part of broad tax and spending reforms. Product market reforms should also be prioritized because they usually boost output but do not weigh on public finances or aggregate demand. In the case of France, significant cuts in the labor tax wedge on lower incomes have been implemented in a period of very low growth, partly financed by spending containment, and combined with product market reforms.
16. In cyclical downturns, certain labor market reforms could potentially exacerbate unemployment in the short term. This applies, in particular, to reforms that cut unemployment benefits and job protection in downturns where employment is generally declining. One strategy could be to enact such measures with a delay, so that they become effective when a recovery is underway. If the enacted measures are credible and no backtracking is expected, they could induce firms to invest and hire prospectively, in advance of the actual implementation of the reforms. Another approach is to use “grandfathering” by applying new rules only to new beneficiaries (of permanent job contracts or unemployment benefits) and exempting current beneficiaries. However, this may not be legally possible in some jurisdictions, can raise important questions about equal treatment of all employees, and may also blunt the impact of the reform for several years. In the case of France, with a moderate recovery underway and private sector hiring generally net positive, the timing appears appropriate for such reforms, with careful consideration of social implications, which may require targeted measures to mitigate the impact on the most vulnerable.
Labor Tax Wedge
17. Elevated labor taxes in France have contributed to high overall labor costs. For the average wage earners, the labor tax wedge accounted for nearly half of the payroll in 2014, among the highest in the OECD. The elevated labor tax wedge and resilient wage growth have made France’s hourly cost of labor one of the highest in the EU.
Tax Wedge of Average Wage Earners by Component, 2014
(Percent)
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Note: Tax wedge for singles with no child earning 100 pct. of average wage.Source: Joint EC - OECD Tax & benefits indicators.Hourly Labor Costs in EU Countries, 2015
(Euros)
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Source: Eurostat.18. The literature indicates that cuts in labor taxes can help boost output and employment. According to IMF cross-country model simulations, a reduction of 1 percent in labor tax wedges increases the level of output (employment) by about 0.15 (0.2) percent in the year of the shock and by about 0.6 (0.7) percent after four years (IMF April 2016 WEO, Chapter 3; cf. Bassanini and Duval, 2006 and references cited therein). Specifically for France, recent IMF staff research suggests that cutting labor taxes would help increase output and reduce inequality (Espinoza and Pérez Ruiz, 2016).
19. The French government has taken measures to reduce the effective taxation of low wage earners. The tax rebate for competitiveness and employment (Crédit d’impôt pour la compétitivité et l’emploi, CICE) offsets payroll taxes on low wages up to 2.5 times the minimum wage, in the amount calculated as 4 percent of payroll in 2013 and 6 percent for subsequent years. The Pact for Responsibility and Solidarity (Pacte de responsabilité et de solidarité, PRS) implemented progressively in 2015–16 provides for a 1.8 percentage point reduction in employers’ social security contributions for wage earners up to 3.5 times the minimum wage. These measures will reduce the labor tax burden by up to 1½ percent of GDP between 2013 and 2017. They will top up the Fillon reductions of social security contributions paid by employers (allègements généraux des cotisations sociales patronales) for workers paid up to 1.6 minimum wage. As a result, the labor tax wedge on low wage earners—measured for those earning just half of the average wage—came down to 3½ percent in 2014, which was below that of many other EU and OECD countries. It will come down further as the cuts are fully phased in by 2017. Overall, the budget cost of the labor tax reductions will come to more than 1½ percent of GDP. In addition, in early 2016 President introduced a new temporary subsidy of €500 per quarter to support hiring low-paid workers in small and medium companies, which would subtract from the effective tax burden on labor.
Tax Wedge of Low Wage Earners by Component, 2014
(Percent)
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Note: Tax wedge for singles with no child earning 50 pct. of average wage.Source: Joint EC - OECD Tax & benefits indicators.Taxes on Labor in EU Countries, 2012
(Percent of GDP)
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Sources: DG Taxation and Customs Union and Eurostat.Taxes on Labor in EU Countries, 2012
(Percent of total taxation)
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Sources: DG Taxation and Customs Union and Eurostat.20. Further reduction in the labor tax wedge would entail difficult trade-offs. Benefits may be limited as labor taxes for lower wage earners have already been cut significantly, and tax wedge reductions for middle and higher wage earners may not have a strong impact on unemployment since labor supply at this wage level is likely to be inelastic.13 Conversely, costs could be considerable. Even as labor taxes in France are overall still higher than in most EU countries, their share in total taxation is close to the EU average. Put differently, the relative tax on labor is not out of line with peer countries, and its level primarily reflects France’s high government spending, including on the social programs financed by the social security contributions that constitute the labor tax wedge. As France is working on reducing its budget deficit in the context of the EC excessive deficit procedure, it has very limited fiscal space for discretionary tax cuts. Thus, any further reduction in the labor tax burden would require either offsetting revenue measures or expenditure cuts, which might prove difficult to identify in the short term.
Employment Rate and Protection, OECD Countries
(Left axis in percent; bottom axis in index, 0–6, higher = more protection)
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Sources: OECD and IMF Staff calculations.Temporary Work and Employment Protection, OECD
(Left axis in percent; bottom axis in index, 0–6, higher = more protection)
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Sources: OECD and IMF Staff calculations.Employment Protection
21. Available indicators suggest that the employment protection in France is stronger than in many other EU countries, particularly for temporary contracts. According to the OECD composite measures, strictness of employment protection in France is somewhat above the EU average for regular contracts (CDI) and is much higher for temporary contracts (CDD). However, the flexibility of short-term employment is higher in the industries that can use a special type of short-term contract (contrat à durée déterminée d’usage) which comes with less regulatory requirements (Dares Eclairages, 2016).
Strictness of Employment Protection, 2013
(Individual and collective dismissals, temporary contracts)
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Source: OECD.Strictness of Employment Protection, 2013
(Individual and collective dismissals, regular contracts)
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Source: OECD.22. In the OECD countries, tighter employment protection is associated with lower employment and higher share of precarious short-term contracts, particularly among the youth. While safeguarding the interests of current employees (“insiders”), tight employment regulations often makes it more difficult for “outsiders”—young people entering the labor market and those currently unemployed—to find a job.
23. Cumbersome regulations and procedures enabling laid-off workers to contest their dismissals in labor tribunals entail costly and uncertain outcomes for companies. According to OECD, average compensation awarded by French labor arbitration tribunals (prud’hommes) in a typical case of unfair dismissal of an employee with 20 years’ tenure amounts to 16 months of salary (Table 2). This is higher than in most countries in Europe, though still lower than in neighboring Germany and Italy. What sets the French system apart is a particularly long time after dismissal when the employee can appeal the decision at a labor tribunal—2 years in France compared to between 20 days and 1 year in peer countries, which entails a particularly long period of uncertainty for French companies.
Selected Indicators of Employment Protection, 2013
In France, the time period is limited to 2 years for most cases, but is extended to 5 years for specific cases involving discrimination and moral harassment.
Selected Indicators of Employment Protection, 2013
| Length of trial period when regular contracts are not fully covered by employment protection provisions (months) | Compensation following unfair dismissal (typical for 20 years’ tenure) (months of salary) | Maximum time period after dismissal up to which an unfair dismissal claim can be made | |
|---|---|---|---|
| Belgium | 4.75 | 4.55 | 1 year |
| France | 3.75 | 16 | 2 years 1/ |
| Germany | 6 | 18 | 3 weeks |
| Italy | 3 to 6 | 21 | 60 days |
| Netherlands | 2 | 7 | 6 months |
| Spain | 2 to 6 | 12 | 20 working days |
| United Kingdom | n/a | 5.5 | 3 months |
In France, the time period is limited to 2 years for most cases, but is extended to 5 years for specific cases involving discrimination and moral harassment.
Selected Indicators of Employment Protection, 2013
| Length of trial period when regular contracts are not fully covered by employment protection provisions (months) | Compensation following unfair dismissal (typical for 20 years’ tenure) (months of salary) | Maximum time period after dismissal up to which an unfair dismissal claim can be made | |
|---|---|---|---|
| Belgium | 4.75 | 4.55 | 1 year |
| France | 3.75 | 16 | 2 years 1/ |
| Germany | 6 | 18 | 3 weeks |
| Italy | 3 to 6 | 21 | 60 days |
| Netherlands | 2 | 7 | 6 months |
| Spain | 2 to 6 | 12 | 20 working days |
| United Kingdom | n/a | 5.5 | 3 months |
In France, the time period is limited to 2 years for most cases, but is extended to 5 years for specific cases involving discrimination and moral harassment.
24. Reducing judicial uncertainty around dismissals should increase firms’ incentives for hiring on open-ended contracts as long as the recovery continues. According to the existing literature and recent IMF research, reforms easing dismissal regulations, on average, have little effects on employment and other macroeconomic variables (IMF April 2016 WEO, Chapter 3). However they have a sizable positive impact on output and employment when economic conditions are stronger, whereas the impact can become contractionary during periods of slack. Current trends in the French economy are becoming generally more supportive of the reform efforts, with real GDP growth now around 1½ percent, and employment beginning to increase as private sector hiring now generally exceeds dismissals, suggesting that the timing is generally appropriate for such reforms, although consideration of social implications remains important.
25. Over the last 12 months, the government has advanced a number of reforms addressing rigidities of dismissal procedures. The Macron law adopted in August 2015 simplified and shortened procedures for consideration of individual cases in the labor tribunals. It also set indicative limits on the compensations that could be awarded by the labor tribunals depending on the number of years that the worker was employed by the company.14 The El Khomri law, currently in parliament, would clarify that companies experiencing operational losses related to cash flow, turnover, and order volume for 1 to 4 quarters (depending on the company size) have legitimate economic reason for dismissing staff.
26. The El Khomri law would also simplify dismissal procedures for workers who refuse to participate in collective agreements, with a view to protecting employment in loss-making companies. Since 2013, companies experiencing losses have the option to negotiate a temporary collective agreement with their employees reducing their remuneration or extending working hours in exchange for commitment to not dismiss anybody for up to 2 years. However, these employment protection agreements (accord de maintien de l’emploi) have seen very limited use (with less than 15 of them in the three years since their introduction), in part due to multiple restrictions imposed on both workers and the company management and difficulty of handling workers who refused to participate in the agreements (for details, see Barthélémy and Cette, 2015A). To promote their use, the Macron law extended their maximum time from 2 to 5 years and simplified some procedures. The El Khomri law would allow companies to more securely dismiss employees who refused to participate in the agreement approved by the majority of staff. More generally, it extends the scope of such agreements to cases when companies expand into new products and markets (accord offensif), with the condition that the company does not cut the monthly salaries of employees.
27. These reforms should increase labor market flexibility, reduce duality, and have moderate short-term impact on unemployment. The most direct measurable impact of the Macron law on job creation was through the product market reforms included in it. The government estimates that liberalization of bus routes by the Macron law created 1,300 new jobs in the sector in the first six months after enactment, while extension of working hours for commercial centers has created hundreds of new jobs, and, overall, the law would create up to 15,000 new jobs by 2020. Early simulations of the El Khomri law’s impact on employment conducted using Worksim model suggest that it will have little impact on overall unemployment, but would lower youth unemployment and encourage more permanent hiring (CDI contracts) as opposed to short-term hiring on CDD (Kant and Ballot, 2016). According to an assessment by Coe-Rexecode think-tank, simplification of dismissal procedures would increase hiring on open-ended contracts by about 300,000 per year, but with a proportional reduction in short-term recruitment.15 Overall, all measures in the El Khomri law—most notably, those pertaining to collective agreements and company-level bargaining (see below)—would help create only 50,000 new jobs (Jessua and Tychey, 2016), which could reduce the unemployment rate by 0.14 percentage points. These estimates are broadly consistent with the literature (see IMF April 2016 WEO, Chapter 3).
Collective Bargaining
28. Since the global financial crisis, there has been a renewed interest in the macroeconomic performance of collective bargaining systems. Much of the early policy debate focused on the degree of centralization of wage bargaining. The prevailing view was that highly centralized systems (which provide macro flexibility by inducing unions and firms to internalize the effects of wage claims on economy-wide employment) and decentralized systems (by providing wage flexibility at the firm level) would be preferable to sector-level bargaining (Calmfors and Driffill, 1988). However, recent studies suggest that results depend, to large extent, on flexibility at the firm level, the reach of sector-level agreements, and the effectiveness of coordination (e.g., Blanchard et al., 2014).
29. The crisis experience points to potential benefits of augmenting sector-level bargaining systems with flexibility at the firm level to accommodate temporary shocks. For example, the widespread use of hardship and opening clauses, which allow firms to set less favorable wages and working conditions than those in the applicable sector-level agreement if certain conditions are met, is often seen as one of the factors behind the resilience of the German labor market during the global financial crisis (Dustmann et al., 2014). By contrast, countries such as Portugal and Spain entered the crisis with bargaining systems that continued to rely on strict application of the “favorability principle,” which says that working conditions can be no less favorable to workers than those specified in the sector-level agreement. Since the crisis, both countries have introduced reforms to provide more flexibility to firms (IMF April 2016 WEO, Box 3.2).
Trade Union Membership in OECD Countries
(In percent of total wage and salary earners)
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Source: OECD.Collective Bargaining Coverage in Europe
(Percent of labor force)
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Source: OECD.30. For collective bargaining at the sector level, as in France, coordination among bargaining units matters a lot. The effectiveness of such coordination depends on the quality of industrial relations and the degree of trust among the social partners (Blanchard et al., 2014). IMF research suggests that France can be classified among the countries with “low trust” and “some coordination”, which entails poor unemployment outcome (IMF April 2016 WEO, Chapter 3, Box 3.2).
31. In France, trade unions play a leading role in collective negotiations, even though membership is low. Trade union members account for only about 11 percent of employees (one of the lowest rate among the OECD countries), down from a high of around 30 percent in the 1950s. The unionization rate is even lower in the private sector (less than 9 percent), where it is particularly low in the enterprises with less than 50 employees (5 percent) (Dares Analyses, 2016). However, trade unions play a leading role in negotiating national and industry-wide labor agreements that become binding for all companies (making France the leading country in Europe by the coverage of collective agreements), as well as in company-level collective negotiations. They also take the lead in re-negotiating the country’s unemployment benefits and managing social protection schemes and training programs. The trade unions get their mandate for negotiating on behalf of employees through regular elections. In the last such elections in 2013, about 43 percent of the registered employees cast their votes. Five leading confederations of trade unions—CGT, CFDT, CGT-FO, CFE-CGC, and CFTC—cleared the minimum 8 percent threshold of the votes and gained mandates to represent employees in the labor negotiations with the government and employers (Haut Conseil du Dialogue Social, 2013).
Change in Unemployment Rate
(Percentage points; mean change before versus after 2008)
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Source: IMF World Economic Outlook, April 2016, Box 3.2.32. The existing law effectively requires that company-level agreements provide same or better conditions to workers as set in the branch-level agreements. Strictly speaking, the 2004 Fillon law allows company-level agreements to deviate from branch agreements, which is, to establish less favorable terms for the workers, unless the branch agreement explicitly prohibits such deviation. However, the companies cannot deviate from the branch agreements in the four most important dimensions, which are minimum wage, job classification, supplementary social protection, and multi-company and cross-sector vocational training funds. In practice, companies have made little use of the allowed flexibility, in part because of its limited scope and cumbersome procedures for company-level labor negotiations.
33. The El Khomri law would extend the scope for firm-level collective agreements. Most notably, it would make it easier for companies to extend the overtime through an agreement with their employees while reducing the overtime premium down (from the currently prevailing 25–50 percent) over the normal pay (the legally binding 10 percent would remain) and, if necessary, deviating from the branch agreement in that matter. As discussed above, the El Khomri law allowed companies to more securely dismiss employees who refuse to participate in the employment protection agreements approved by the majority of staff, and extended the scope of such agreements to companies that target aggressive expansion into new products and markets. However, the companies still cannot deviate from sector-level agreements for job classification, or negotiate with their staff a lower minimum pay than that set at the branch level.
34. Moreover, the El Khomri law would reduce the options for unions to block collective agreements in companies. According to the existing law, a collective agreement could be signed by unions representing at least 30 percent of employees. However, it can then be blocked by other unions who together represent more than 50 percent of staff. Now the El Khomri law would provide that in such case, the trade unions that signed the agreement can call for company staff referendum on it, which can validate the agreement by majority vote even if some syndicates oppose it. In this respect, the El Khomri law builds upon the Rebsamen law adopted in August 2015 that streamlined the conditions for social dialogue in companies. However, concerns remain about the quality of social dialogue in small companies with no trade union representation.
Unemployment Benefits
35. While providing an essential social safety net, overly generous unemployment benefits can have unintended consequences, in particular by creating inactivity traps. By insuring workers against the risk of job loss, unemployment benefits play a stabilizing role over the business cycle and allow for a smoother relocation of labor across the economy, as job-seekers can devote more time to finding a job that matches their skills and expectations. At the same time, generous benefits can undermine the incentives to return into employment by reducing the gap between labor and non-labor income, with negative effects on unemployment duration and total unemployment (EU Unemployment Benefits, 2015; Nickell 1997).
36. Income replacement rates of the French unemployment benefits are comparable to those of other OECD countries. The integral measure of the net income replacement rate (NRR) of unemployment benefits entitlement (including social assistance and cash household benefits) stood at about 57 percent for France in 2013. This is broadly in line with its level in other OECD countries with the same GDP per capita. The same applies for NRR of long-term unemployed (over 60 months of unemployment) and for initial unemployment benefits (Table 3). These comparisons indicate that actual payouts to unemployed in France are commensurate with their level in the peer countries. However, a notable difference to other systems is that unemployment benefits in France are capped at over €7,000 per month (Unédic, 2015), which is the highest explicitly set cap in Europe. This is in part justified by the fact that France’s unemployment benefits are designed more as insurance scheme than as social protection mechanism, which makes them less targeted to those in need even if it entails some distributional effects.
Net Replacement Rate in France and OECD Countries, 2013
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Source: OECD.Selected Features of Unemployment Benefits in France and Neighboring Countries
For those younger than 50 years.
Simple average of the net unemployment benefit (including social assistance and cash housing
Recent reforms have limited the duration of benefits for the young (under age 33) to 36 months.
Selected Features of Unemployment Benefits in France and Neighboring Countries
| Minimum qualification period (months) | Maximum duration of benefits 1/ (months) | Contributing to benefits periods (ratio) | Net replacement ratio 2/ | |||
|---|---|---|---|---|---|---|
| Benefit cap (euro/month) | Initial (percent) | Over 60 months of unemployment (percent) | ||||
| Belgium | 12 | unlimited 3/ | n/a | 1,603 | 69.5 | 63.8 |
| France | 4 | 24 | 1:1 | 7,134 | 72.1 | 52.2 |
| Germany | 6 | 12 | 2:1 | 2,483 | 72.5 | 51.3 |
| Italy | 3 | 18 | 2:1 | 1,300 | 68.6 | 9.3 |
| Netherlands | 6 | 38 | 1:1 | 3,212 | 72.1 | 49.4 |
| Spain | 12 | 24 | 3:1 | 1,397 | 65.7 | 38.2 |
| United Kingdom | 6 | 6 | n/a | 380 | 46.1 | 46.4 |
For those younger than 50 years.
Simple average of the net unemployment benefit (including social assistance and cash housing
Recent reforms have limited the duration of benefits for the young (under age 33) to 36 months.
Selected Features of Unemployment Benefits in France and Neighboring Countries
| Minimum qualification period (months) | Maximum duration of benefits 1/ (months) | Contributing to benefits periods (ratio) | Net replacement ratio 2/ | |||
|---|---|---|---|---|---|---|
| Benefit cap (euro/month) | Initial (percent) | Over 60 months of unemployment (percent) | ||||
| Belgium | 12 | unlimited 3/ | n/a | 1,603 | 69.5 | 63.8 |
| France | 4 | 24 | 1:1 | 7,134 | 72.1 | 52.2 |
| Germany | 6 | 12 | 2:1 | 2,483 | 72.5 | 51.3 |
| Italy | 3 | 18 | 2:1 | 1,300 | 68.6 | 9.3 |
| Netherlands | 6 | 38 | 1:1 | 3,212 | 72.1 | 49.4 |
| Spain | 12 | 24 | 3:1 | 1,397 | 65.7 | 38.2 |
| United Kingdom | 6 | 6 | n/a | 380 | 46.1 | 46.4 |
For those younger than 50 years.
Simple average of the net unemployment benefit (including social assistance and cash housing
Recent reforms have limited the duration of benefits for the young (under age 33) to 36 months.
37. However, France’s eligibility criteria are among the laxest in Europe. A person becomes eligible for the unemployment benefits after making contributions for only 4 months, which is among the lowest thresholds in Europe and OECD. In a steep progression, the person becomes eligible for up to a maximum 24 months of unemployment benefits after contributing for the same 24 months, which is also among the fastest in Europe. The conditions are even more beneficial for seniors older than 50 years, who become eligible for up to a maximum of 36 months of benefits after contributing for the same 36 months.
Length of Contributions and Unemployment Benefits
(In months, for workers younger than 50 years)
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Sources: Europ’Info, 2012: “L’assurance chômage en Europe,”—Edition N°9, July 2012; and national authorities.1/ Belgium has unlimited length of unemployment benefits.Terms of Reasonable Job Offer in France and Germany
(Percent of previous salary)
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Source: National unemployment agencies.38. Job search requirements and their enforcement are comparatively weak. The unemployed can reject the first suitable job offer without any penalty (the sanctions begin only with refusing the second such offer), which is unparalleled in other EU or OECD countries (Table 4). Moreover, the terms of what constitutes the “suitable job offer,” including the criterion that the new wage is no less than 85–100 percent of the old one in the first year of unemployment, are more favorable to the unemployed than in neighboring Germany (Figure) and in many other countries. In addition, the requirement for the active job search was not very strictly enforced until recently. Finally, information on the available job offers is often difficult to obtain.
Sanctions for Refusing the First Reasonable Job Offer in Selected EU Countries
Sanctions for Refusing the First Reasonable Job Offer in Selected EU Countries
| Belgium | Suspension of benefits for 4–52 weeks, typically for 10–14 weeks |
| France | No penalty |
| Germany | Suspension of benefits for 3 weeks |
| Italy | Loss of unemployment seniority |
| Netherlands | Reduction of benefits by 25 percent for at least 4 months |
| Spain | Loss of benefits for 3 months |
| United Kingdom | A variable sanction of 1–26 weeks (depending on the circumstances) |
Sanctions for Refusing the First Reasonable Job Offer in Selected EU Countries
| Belgium | Suspension of benefits for 4–52 weeks, typically for 10–14 weeks |
| France | No penalty |
| Germany | Suspension of benefits for 3 weeks |
| Italy | Loss of unemployment seniority |
| Netherlands | Reduction of benefits by 25 percent for at least 4 months |
| Spain | Loss of benefits for 3 months |
| United Kingdom | A variable sanction of 1–26 weeks (depending on the circumstances) |
39. The existing system, including certain specificities of the benefit formula, creates incentives for alternating between ultra-short contracts and unemployment. A person working on ultra-short (less than a month) work contracts for the minimum wage (SMIC) for 46 percent of the time and tapping unemployment insurance between them, topped up with other benefits, can make an income equal to 83 percent of someone who works full time for SMIC (Cahuc and Prost, 2015). Moreover, that person can stay on the pattern intertwining ultra short-term employment and unemployment benefits for an unlimited period of time as during his work spells he renews eligibility for the unemployment benefits. According to some estimates, the net cost of covering short-term contract employees amounts to at least €5 billion per year, which is comparable to the entire deficit of the unemployment insurance scheme. Among them, the special regime enjoyed by the short-term contractual employees in the entertainment sector (intermittents du spectacle) is particularly favorable. Unemployment payments to employees of that sector counting only 3 percent of all unemployed are responsible for up to 1/4 of the system’s deficit (Cour des Comptes, 2016).
40. The bi-annual renegotiation of unemployment benefits commenced in February 2016, with the objective of the reducing the deficit of the insurance system. In France, the terms of unemployment benefits are subject to regular bi-annual renegotiation between employers and trade unions. Setting the stage for the discussions, the government produced a report on the financial health of the insurance scheme (Government report, 2015). Alongside, the unemployment agency Unédic produced a report summarizing key features of the system and comparing them with other EU countries (Unédic, 2016). In addition, the government’s audit chamber Cour des comptes analyzed Unédic’s financial situation and outlined a number of reform options for improving it (Cour des Comptes, 2016). The negotiations are meant to deliver solutions for improving efficiency of the unemployment insurance scheme and reducing its deficit, which amounted to 0.2 percent of GDP in 2015 (and, cumulative with deficits of previous years, has contributed to Unédic’s debt of 1.2 percent of GDP at end-2015). As the negotiations have not been completed by mid-2016, the government has the option of extending the previous agreement (convention 2014).
41. The main reform options outlined so far concern access criteria, degressivity of benefits, and special regimes available to contractual employees. Pointing at the direction of possible reforms, Cour des Comptes quantified savings from raising the benefits eligibility threshold from 4 to 6 months and abolishing or modifying seniors’ eligibility for extended benefits. It also considered using coefficient of 0.9 instead of the current principle “one day of contributions qualifies for one day of benefits” (Table 5). Another option under discussion is to re-introduce degressivity, a progressive reduction in benefits for long-term unemployed. In addition, there is a growing perception that the existing regime is too favorable for contractual employees who tap unemployment benefits between short-term contracts. One way to balance the benefits accorded to contractual employees might be to increase their actual contributions to the unemployment insurance system, or increase contributions for companies that make most use of short-term contracts. Yet another way is to change the calculation of benefits paid to the short-term employees so as to re-align it with their actual working time and paid contributions.
Selected Expenditure Savings Measures Quantified by the Cour des Comptes
Selected Expenditure Savings Measures Quantified by the Cour des Comptes
| Measure | Annual savings, € billion |
|---|---|
| Raise the benefits’ eligibility threshold from 4 to 6 months | 1.8 |
| Curtail the maximum length of benefits (now at 24 months) | … |
| Abolish the extended benefits (up to 36 months) for seniors | 1.0 |
| Raise the age for seniors’ eligibility for extended benefits (up to 36 months) from 50 to 55 years | 0.45 |
| Use the coefficient of 0.9 instead of the principle “one day of contributions qualifies for one day of benefits” | 1.2 |
| Cut the benefit replacement rate by 1 percentage point | 0.422 |
Selected Expenditure Savings Measures Quantified by the Cour des Comptes
| Measure | Annual savings, € billion |
|---|---|
| Raise the benefits’ eligibility threshold from 4 to 6 months | 1.8 |
| Curtail the maximum length of benefits (now at 24 months) | … |
| Abolish the extended benefits (up to 36 months) for seniors | 1.0 |
| Raise the age for seniors’ eligibility for extended benefits (up to 36 months) from 50 to 55 years | 0.45 |
| Use the coefficient of 0.9 instead of the principle “one day of contributions qualifies for one day of benefits” | 1.2 |
| Cut the benefit replacement rate by 1 percentage point | 0.422 |
Minimum Wage
42. Combined with in-work benefits and measures to reduce the non-wage cost of low-paid jobs, a statutory minimum wage set at an appropriate level can raise labor force participation without adversely affecting demand. According to the literature, there is some evidence that maintaining the purchasing power of minimum wages at around 30 to 40 per cent of median wages sustains demand and reduces poverty and income inequalities. However, statutory wage floors systematically set at levels significantly above that range entail the risk that these benefits would be more than offset by lost job opportunities, especially for youth and low-skilled workers. Allowing the minimum wage to slip significantly below that range risks exacerbating poverty and weakening aggregate demand (ILO, OECD, IMF and the World Bank, 2012; Vaughan-Whitehead, 2010).
43. The ratio of minimum wage to the median wage in France is among the highest in Europe and OECD, which weighs negatively on employment. The minimum wage (Salaire minimum interprofessionnel de croissance, SMIC) in France is currently about 60 percent of the median wage, well above the average for the OECD countries. The relatively high SMIC, which was not reduced as the workweek was shortened to 35 hours in 2000, may well have contributed to the relatively elevated unemployment among young and low-skilled workers in France. According to one estimate, 1 percent increase in SMIC would lead to 1.5 percent loss in employment remunerated at the minimum wage in France in the 1990s (Kramarz and Philippon, 2001).
OECD: Ratio of Minimum to Median Wage, 2014
(Percent; for full-time workers)
Citation: IMF Staff Country Reports 2016, 228; 10.5089/9781498359917.002.A001
Source: OECD.44. Some countries use exemptions from the minimum wage to limit potential adverse effects on employment for certain categories of workers. Such exemptions could be provided for young workers entering the labor market, for low-skilled workers, and for long-term unemployed. In France, a lower minimum wage is set for the young workers under 18 with less than 6 months of professional experience, with 20 percent reduced SMIC for those under 16 and 10 percent for those younger than 17. Also, lower minimum remuneration is set for apprentices and for those enrolled in the professional learning contracts (contrat de professionnalisation). Still, several neighboring EU countries have wider exemptions from the minimum wage for the youth and long-term unemployed than those provided in France.
Minimum Wage Exemptions in Selected EU Countries
Minimum Wage Exemptions in Selected EU Countries
| Belgium | Lower minimum wage rate for those below the age of 21 years. Lower rates also for those with seniority of less than 6 and 12 months. |
| France | Minimum wage reduced by 10–20 percent for the young workers under 18 with less than 6 months of professional experience. Also, lower minimum wage for apprentices and for those in contrat de professionnalisation. |
| Germany | Those under the age of 18 years, apprentices, interns, and long-term unemployed during their first 6 months of reemployment are exempt. |
| Netherlands | Age-dependent fraction of standard minimum wage for those under the age of 23 years. Lowering the threshold to 21 years is under discussion. |
| U.K. | Age-dependent fraction of standard minimum wage for those under the age of 25 years. |
Minimum Wage Exemptions in Selected EU Countries
| Belgium | Lower minimum wage rate for those below the age of 21 years. Lower rates also for those with seniority of less than 6 and 12 months. |
| France | Minimum wage reduced by 10–20 percent for the young workers under 18 with less than 6 months of professional experience. Also, lower minimum wage for apprentices and for those in contrat de professionnalisation. |
| Germany | Those under the age of 18 years, apprentices, interns, and long-term unemployed during their first 6 months of reemployment are exempt. |
| Netherlands | Age-dependent fraction of standard minimum wage for those under the age of 23 years. Lowering the threshold to 21 years is under discussion. |
| U.K. | Age-dependent fraction of standard minimum wage for those under the age of 25 years. |
45. The minimum wage in France is set by the government according to a formula, with input from an expert group and in consultation with social partners. The formula for the minimum wage links it to the rate of past inflation (consumer price index based on the representative consumption basket of the poorest 20 percent of households) and half an increase in the average real wage of factory workers and employees in economy (salaire horaire des ouvriers et employés, SHBOE). The independent expert group prepares an annual report that considers the parameters of the minimum wage increase according to the formula and recommends whether the economic circumstances warrant application of the additional hike (coup de pouce). The formula for the minimum wage increase has no link to the unemployment rate, which contributes to wage stickiness, particularly in periods of weak labor market conditions. Specifically, industry and firm-level data confirm that the national minimum wage plays a key role in the wage bargaining calendar. It modifies the patterns of wage changes over the year, and the higher the percentage of minimum-wage workers, the less frequently the firms negotiate (Avouyi-Dovi et al., 2011).
References
Avouyi-Dovi, Sanvi, Denis Fougère, and Erwan Gautier, 2011: “Wage Rigidity, Collective Bargaining and the Minimum Wage: Evidence from French Agreement Data.”—IZA DP No. 5835, July 2011.
Ball, L., 2009. “Hysteresis in Unemployment: Old and New Evidence”. NBER Working Paper No. 14818.
Ball, L., D. Leigh and P. Loungani, 2016. “Okun’s Law: Fit at Fifty?” Manuscript(revising NBER Working Paper No. 18668).
Barthélémy, Jacques, and Gilbert Cette, 2015A: “Réformer le droit du travail.”—TerraNova foundation, September 2015.
Barthélémy, Jacques, and Gilbert Cette, 2015B: “Le contrat unique. Une auberge Espagnole.”—Revue de l’OFCE, 146, 2015.
Bassanini, Andrea, and Romain Duval, 2006: “Employment Patterns in OECD Countries: Reassessing the Role of Policies and Institutions.”—OECD Economics Department Working Paper 486, Paris, 2006.
Blanchard, Olivier, Florence Jaumotte, and Prakash Loungani, 2014: “Labor Market Policies and IMF Advice in Advanced Economies during the Great Recession.” IZA Journal of Labor Policy 3 (1): 1–23, 2014.
Blanchard, Olivier, and Lawrence Summers, 1986: “Hysterisis and the European Unemployment Problem.”—in NBER Macroeconomics Annual 1986, Volume 1, Fischer. 1986.
Blanchard, Olivier, and Jean Tirole, 2003: “Protection de l’emploi et procédures de licenciement,”—Rapport du Conseil d’analyse économique, 44.—La Documentation française. Paris, 2003
Cahuc, Pierre, and Corinne Prost, 2015: “Improving the Unemployment Insurance System in Order to Contain Employment Instability.”—Les notes du conseil d’analyse économique, no 24, September 2015.
Calmfors, Lars, and John Driffill, 1988: “Bargaining Structure, Corporatism, and Macroeconomic Performance.”—Economic Policy 3 (6): 13–62.
Camdessus, Michel, 2004: “Le sursaut – Vers une nouvelle croissance pour la France.”—La Documentation française, 2004.
Cahuc, Pierre, and Francis Kramarz, 2005: “De la précarité à la mobilité: Vers une Sécurité sociale professionnelle.”—Rapport au ministre des Finances et de l’industrie et au ministre de l’Emploi, du travail et de la cohésion sociale.—La Documentation française, 2005.
Cour des comptes, 2016: “L’unedic et sa gestion de l’assurance chomage.”—Cour des comptes, Observations définitives, January 2016.
Daly, M. C., J.G. Fernald, O. Jordà, F. Nechio, 2016, “Shocks to Firms”, manuscript, Federal Reserve Bank of San Francisco.
Dares Analyses, 2016: “La syndicalisation en France. Des salariés deux fois plus syndiqués dans la fonction publique.”—Dares analyses N°025, May 2016.
Dares Eclairages, 2016: “La majorité des embauches en contrats courts se font chez un ancien employeur.”—Dares éclairages n° 14, January 2016.
Dinsey, Richard, 2000: “The Impact of Tax and Welfare Policies on Employment and Unemployment in OECD Countries.”—IMF Working Paper WP/00/164, October 2000.
Dustmann, Christian, Bernd Fitzenberger, Uta Schönberg, and Alexandra Spitz-Oener, 2014: “From Sick Man of Europe to Superstar: Germany’s Resurgent Economy.”—Journal of Economic Perspectives 28 (1): 167–88, 2014.
Espinoza, Raphael, and Esther Pérez Ruiz, 2016: “How Do Fiscal and Labor Policies in France Affect Inequality?”—IMF Working Paper WP/16/41, February 2016.
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Europ’Info, 2012: “L’assurance chômage en Europe.”—Edition N°9, July 2012.
France Strategie, 2016: “2017/2027: Competitivite: que reste-t-il a faire?”. Note d’analyse.
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Haut conseil du dialogue social, 2013: “Présentation de la mesure d’audience syndicale au niveau national et interprofessionnel.”—Haut conseil du dialogue social, Mars 2013.
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Prepared by Nicoletta Batini. Comments from the French authorities are gratefully acknowledged.
Thanks to faster increases in labor factor productivity than in wages, French unit labor costs remained well below the EU28 average between 2014–15, growing on average by 0.5 percent over this period versus 1.7 percent in the EU28. Taking into account the tax credit for employment and competitiveness (CICE) introduced in 2013, it is estimated that unit labor costs fell by ½ percent in 2015 according to the authorities.
The Okun relationship does not imply causality from the jobless rate to growth or vice versa, but merely records the strength of the co-movement between these variables. A steepening of the curve in Figure 3 means that swings in the economic cycle are associated with smaller variations in unemployment and vice versa.
In 2014, the long-term unemployment rate was 2.2 in both Germany and the United Kingdom; while the very long-term unemployment rate was, respectively, 1.2 and 1.5 percent.
Following Ball (2009) we run the following regression: U*= (1-c(1))*U*t_1+c(1)*Ut_1, where U is the unemployment rate and U* is the NAIRU, estimated using a multivariate filter. Estimating the c(1) coefficient recursively we find that this coefficient has increased since 2009, albeit marginally.
Empirically, it is unlikely that the relationship between the NAIRU and unemployment is linear. Changes in unemployment sometimes cause changes in the NAIRU and sometimes they do not. In practice, the relationship seems to depend on the past history of the NAIRU and the length of time that unemployment is pushed away from its structural level. In France, actual unemployment and the NAIRU have traditionally been close, given the elevated level of structural unemployment over the past decades.
According to a wide survey of French firms by the Banque de France in conjunction with the European Central Bank asking how the crisis affected their activity and their behavior, based on respondents replies the main economic shock affecting activity was a tightening of demand (see Jadeau et al., 2015).
The survey found that the factors considered as significantly constraining for employment growth by a large majority of firms between 2010 and 2013 were uncertainty about economic conditions, risks that labor laws are changed, high payroll taxes and firing costs.
The expectation is that unemployment and vacancies tend to move along a downward-sloping curve across the business cycle. However, structural changes in the economy can cause the Beveridge curve to shift. During times of uneven growth across regions or industries, the vacancy and unemployment rates can rise at the same time. Conversely, they can both decrease when matching efficiency improves for instance to improved education or training, or better flow of job vacancy information.
The growing participation of women is evident in the three largest euro area economies, but particularly prominent in France, where female participation in the age cohort 50–64 has increased by 10 percentage points (2 points above men’s) since the crisis, after having remained flat for a long period. Following the 2010 pension reform, which increased the statutory retirement age by two years and reduced incentives for earlier retirement, the employment rate among 55–59 years-olds has increased to 68 percent, and to around 25 percent for the 60–64 age group.
The marginal moderation of the minimum wage reflects, in part, efforts on the side of the government since 2008 to ensure that changes to the minimum wage better reflect economic conditions.
Prepared by Michael Gorbanyov. Comments from the French authorities are gratefully acknowledged.
For a competitive labor market with inelastic labor supply, a tax on labor is borne by workers through a divergence between the real production wage and the real consumption wage (Dinsey, 2000). The literature suggests that in France and other OECD countries, labor supply elasticity of full-time men in response to changes in the net wage is close to zero (e.g., Pencavel, 1986). In this situation, the positive impact of the labor tax reduction on employment could work through stimulating activity rates among women and part-time workers.
The decree containing these provisions is yet to be published at the time of writing.
Another way to resolve the duality of permanent and temporary employment in France might be to replace CDI and CDD with a new labor contract. According to its proponents, a so-called contrat unique would combine the flexibility of short-term contract with the security of permanent employment (Blanchard and Tirole, 2003; Camdessus, 2004; Cahuc and Kramarz, 2005; Tirole, 2016). The basic idea is to make all new recruitment open ended while simplifying dismissals and limiting the severance pay. However, by effectively eliminating CDDs, there is a risk that France’s labor market could become less flexible and that hiring might initially decline, unless deeper reforms around labor protection and dismissals are undertaken at the same time (Barthélémy and Cette, 2015B).
References
Arrondel, L., Savignac, F., and Tracol, K. “Wealth effects on consumption plans: French households in the crisis”, International Journal of Central Banking, Vol. 10 No. 3, September 2014.
Autorité de Contrôle Prudentielle et de Résolution. “The international banking activities of France’s main Banking groups since 2006”, Analyse et Synthèse N. 26, Octobre 2014.
Autorité de Contrôle Prudentielle et de Résolution. “French banks’ performance in 2014”, Note Analyse et Synthèse N.46, May 2015.
Banque de France, 2015, “Evaluation des Risques du Système Financier Français”, Banque de France, December 2015.
Banque de France. Financial Stability Review, 2016.
Basel Committee on Banking Supervision. “Global systemically important banks: assessment methodology”, Basel, 2011.
Cardarelli, R., Elekdag, S., and Lall, S. “Financial Stress, Downturns, and Recoveries,” World Economic Outlook, IMF, October 2008.
Chauvin, V. and Damette, O. “Wealth Effects: the French case”, Banque de France Working Paper No. 276, January 2010.
Claessens, S., Coleman, N., and Donnelly, M. “Low-for-long” interest rates and interest margins of banks in Advanced Foreign Economies”, International Finance Discussion Paper Note April 2016, Board of Governors of the Federal Reserve System, 2016.
Erbenova, M., et al. “The withdrawal of correspondent banking relationships: a case for policy action”, forthcoming IMF Staff Discussion Note.
European Banking Authority, 2015, “Report of the 2015 EU-wide Transparency Exercise”, November 25, 2015.
European Central Bank. “Recent trends in euro area banks’ business models and implications for financial sector stability”. Financial Stability Review, May 2016, Chapter C.
European Systemic Risk Board, 2015, “ESRB Recommendation on US dollar denominated funding of credit institutions (ESRB 2011/2) – follow up report overall assessment”, ESRB European System of Financial Supervision.
Goyal et al. “A Banking Union for the Euro Area”, IMF Staff Discussion Note 13/1, 2013.
Haut Conseil de Stabilité Financière, Rapport Annuel, Juin 2015.
International Monetary Fund, “2012 Spillover Report, Background Papers”, 2012.
International Monetary Fund, “2013 IMF Spillover Report – Analytical Underpinnings and Other Backgrounds”, Chapter III, 2013.
Poirson, H. “France: Financial Sector Assessment Program –Technical Note on Housing Prices and Financial Stability”, IMF Country Report No. 13/184, June 2013.
Sy, A. “French Banks: Business Model and Financial Stability” IMF Country Report No. 13/3, IMF, 2013.
Comments from the French authorities are gratefully acknowledged.
Prepared by Piyabha Kongsamut, Thierry Tressel (EUR), with input from Johannes Eugster (SPR).
Cardarelli, Roberto, Selim Elekdag, and Subir Lall, 2008, “Financial Stress, Downturns, and Recoveries,” Chapter 4 of the October 2008 WEO.
Each variable is standardized by demeaning and divided by its standard deviation. The overall index is a composite measure of the subindices and captures market movements relative to averages or trends.
Specifically, we report the correlation of FSI in one period with real GDP growth in Q, Q+1, Q+2, Q+3 and Q+4.
This finding is broadly unchanged if we compute the correlations starting in 2009Q1.
These include Germany, Italy, Netherlands, Spain, United Kingdom, and United States. The regressions were run on quarterly data for the entire sample period, beginning in 1980, with data availability varying by country but all encompassing the global financial crisis period. Stationarity tests were conducted and have been taken into account; the macro aggregates (real and credit variables) were nonstationary.
Granger causality is a statistical procedure which tests for the joint significance of lagged variables of interest on a specific variable. For example, a test can be conducted whether past values of FSI are significant in a regression with current business investment on the left hand side, also controlling for lagged values of FSI at the same lag length. If the joint test is rejected, then FSI is said to “Granger-cause” business investment. Because the macro aggregates (real and credit variables) were non stationary, differences were used in the tests, while FSI was kept in levels.
See “Wealth effects on consumption plans: French households in the crisis”. Luc Arrondel, Frédérique Savignac and Kévin Tracol, 2011, and “Wealth Effects: the French case”. Valerie Chauvin and Olivier Damette, 2010. See also “France: Financial Sector Assessment Program –Technical Note on Housing Prices and Financial Stability”, June 2013, IMF Country Report No. 13/184.
Prepared by Thierry Tressel (EUR).
The analysis is based on publicly available data for BNP-Paribas, Société Générale, Groupe Crédit Agricole and BPCE. BPCE is dropped in analysis comparing publicly listed banks. For Crédit Agricole, stock price data are for Crédit Agricole S.A., which is the listed entity of Groupe Crédit Agricole. The latter also comprises local banks and regional banks.
See Selected Issues Paper 2013, French Banks: Business Model and Financial Stability (by Amadou Sy).
Life insurance savings, which account for 40 percent of households’ savings, are free of income tax if redeemed after 8 years.
For BPCE, the figure includes the operating income of Caisses d’Epargne and Banques Populaire banks.
Basel Committee on Banking Supervision, 2011, “Global systemically important banks: assessment methodology”, Basel.
See for instance: International Monetary Fund, 2012 Spillover Report, Background papers, July 10, 2012.
European Banking Authority, 2015, Report of the 2015 EU-wide Transparency Exercise, November 25, 2015.
The 2015 EBA transparency exercise showed that the return on regulatory capital of French banks is at the European average. Their main risk exposures are related to credit and operational risks.
Fees and Commissions on current accounts have increased recently as noted in the December 2015 Evaluation des Risques du Système Financier Français published by the Banque de France. US banks usually charges higher fees and commissions on mergers and acquisitions and on initial public offerings than their European peers.
Autorité de Contrôle Prudentielle et de Résolution, 2015, “French banks’ performance in 2014”, Note Analyse et Synthèse N.46, May 2015.
The 2015 EBA transparency exercise found that French banks meet the fully loaded Basel III capital requirements. See also the Global Financial Stability Report, Chapter one, April 2016.
The SSM comprehensive assessment in 2014 showed that the risk weights of French banks were adapted to their assets. According to the 2015 EBA transparency exercise, French banks have strong capital buffers and low non performing exposures, but high leverage among a large sample of European banks.
See 2013 IMF Spillover Report – Analytical Underpinnings and Other Backgrounds, Chapter III; and Selected Issues Paper IMF country report 13/03, 2013, French Banks: Business Model and Financial Stability (by Amadou Sy).
European Systemic Risk Board, 2015, “ESRB Recommendation on US dollar denominated funding of credit institutions (ESRB 2011/2) – follow up report overall assessment”, ESRB European System of Financial Supervision. As a consequence of these risks, steps have been taken to strengthen risk management, risk monitoring, and contingency planning.
According to S.E.C. money market fund statistics, French banks’ exposures to US money market funds have averaged around $160 billion in 2015.
For a detailed analysis of the evolution of the international activities of French banks, see Autorité de Contrôle Prudentielle et de Résolution, “The international banking activities of France’s main Banking groups since 2006”, Analyse et Synthèse N. 26, Octobre 2014.
While further investigations are needed to draw definitive conclusions, these simple facts would suggest that the establishment of the Banking Union (the SSM, the SRM) has so far not reversed the fragmentation of the euro area banking system that took place between 2008 and 2012 (see: Goyal et al., 2013, “A Banking Union for the Euro Area”, IMF Staff Discussion Note 13/1.)
Data are from Bankscope. Other G-SIBs include BBVA, Banco Santander, Bank of China, Bank of New York Mellon, Barclays, China Construction Bank, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, Industrial & Commercial Bank of China, ING Bank, JP Morgan Chase, Mitsubishi Financial Group, Mizuho Financial Group, Morgan Stanley, Nordea Bank, Royal Bank of Scotland, Standard Chartered, State Street, UBS, UniCredit, and Wells Fargo.
BPCE is not included because data are not available going back to 2005, and market data are not available.
Other bank indicators such as the NPL ratio were also considered, but were not significant when other controls were added.
This conclusion is based on inspection of the standardized residuals of the regressions. Exclusion of one observation with a somewhat large standardized residual does not affect our main conclusions quantitatively or qualitatively.
The R2 of the regressions reported in Table 3 suggest that the empirical model explains about 40 percent of the variation of bank-specific crisis effects.
Prepared by Thierry Tressel (EUR).
See also Banque de France, 2015, “Evaluation des Risques du Système Financier Français”, Banque de France, Eurosystem, December 2015.
Most mortgages in France are fixed rate mortgages, which can be refinanced at the cost of 6 months of interest.
Spreads are defined as the difference between the average lending rate for the loan category considered and the average deposit rate.
QE has operated along several dimensions. In addition to rates on main refinancing operation (MRO) at zero since March 2016, it consists of: (i) targeted long-term refinancing operations linked to lending to specific sectors, with long maturities (2 to 4 years), and at rates that that have varied with the MRO rate between 15 bps and 0 bps; (ii) asset purchases of €80 billion per months (initially sovereign debt, and extended to corporate bonds); (iii) negative rate on the deposit facility (-0.4 percent at the end of March 2016); and: (iv) some elements of forward guidance.
At the end of March 2016, total lending by the eurosystem to French monetary and financial institutions reached €134 billion.
Annual average of the monthly spread between the deposit rate and the main refinancing rate.
A recent study of the Federal Reserve Board found that low interest rates impact bank net interest margins as interest expenses adjust by less than interest income to a decline in interest rates, particularly in a low interest rate environment (Claessens, Stijn, Coleman, Nicholas, and Michael Donnelly, 2016, “Low -for-long” interest rates and interest margins of banks in Advanced Foreign Economies”, International Finance Discussion Paper Note April 2016, Board of Governors of the Federal Reserve System).
Prepared by Piyabha Kongsamut (EUR).
The listed entity differs from the group entity for two of the French G-SIBs: Crédit Agricole SA, and Natixis of BPCE.
See also Selected Issues 2013, “French banks: business model and financial stability,” by A. Sy.
Data for China, another country with several G-SIBs, is not available.
Within the top 20 foreign exposures of French banks, emerging markets Poland, China, Turkey, and Brazil have joined the list, along with Hong Kong and Singapore, even as Greece, Korea, Norway, and Austria have dropped out.
Data for 2011 have less granular detail on specific country exposures for certain G-SIBs relative to 2015 data (Santander, Unicredit, ING); in these banks the “rest of the world” category may be overstated in 2011.
See “The decline in correspondent banking relationships: a case for policy action”, forthcoming Staff Discussion Note.
See Banque de France’s 2016 Financial Stability Review.
For example, Société Générale recently announced plans to reduce the branch network by 20 percent by 2020.
ECB’s Financial Stability Review, May 2016, Chapter C. “Recent trends in euro area banks’ business models and implications for financial sector stability”.
In this context, the authorities have requested authorization from the European Commission for French banks to contribute up to 0.5 percent of eligible deposits rather than the 0.8 percent harmonized level agreed under the Deposit Guarantee Scheme Directive. This request is based on the (foreseen and allowed for under the Directive) condition that the sector is highly concentrated, with large banking groups which would be more likely to be resolved than liquidated in case of failure, therefore not requiring recourse to the deposit guarantee fund.
