The following OECD assessment and recommendations summarise Chapter 3 of the Economic Survey of France 2005 published on 16 June 2005.
Why does unemployment remain so high and participation so low?
The unemployment rate is currently 10% and has not been below 8% for twenty years, even at the cyclical peak of the late 1990s. There is room for discussion about the precise quantitative effects of strict employment protection and the minimum wage. But these effects, combined with the uncertainty over the cost of dismissal to the employer, and the fact that the minimum cost of labour exceeds the potential productivity of a number of low skilled workers, appear to be responsible for a large part of the high level of structural unemployment, especially among certain groups, such as youth and the long-term unemployed. These policies are intended to place part of the responsibility for income protection and security of employment on employers. Over the years the response of employers to these increases in labour costs has been to reduce the demand for labour even though reductions over the last decade in social insurance contributions for low paid workers have increased employment prospects for the low skilled. High employers' social insurance contributions have the same effect on the demand for labour at wage levels where these reductions no longer have an impact. On the other hand, the interaction of taxes, social security contributions and social benefits also leads to poor labour market performance by tending to reduce the supply of labour.
Unemployment and employment from a long-term perspective
1. As per cent of the age group labour force.
2. As per cent of the working age population.
Source: OECD, ELS database.
When comprehensive account is taken of all taxes on labour income (personal income tax, social security contributions including the supplementary social security taxes CSG and CRDS) and income-tested social benefits, it is seen that marginal effective tax rates on labour are very high in France. Measures have been taken to reduce these disincentives, targeted on low income earners, such as reductions in employers' social security contributions and the prime pour l'emploi (PPE), an income tax credit for people in low paid jobs. Although the PPE has yet to be fully evaluated and would perhaps be more effective if applied to the CSG, which is deducted at source, rather than to income tax which is paid in arrears, these policies have had some beneficial effects on the labour market and should be maintained and if possible expanded. But increases in the minimum wage, the SMIC, such as those that resulted from the reduction in working time, work directly against measures to improve labour demand through reducing costs, although the further reductions in employers' contributions offset the effect on labour costs, at the expense of public finances. Future increases in the SMIC should be limited to those necessary to maintain its purchasing power, in order not to reduce employability among the low skilled.
Relative labour cost at the SMIC(1)
1. Labour cost including social charges of hiring a worker at the SMIC as a per cent of the same costs for an APW
Source: OECD calculations using INSEE data.
The government must not increase unnecessarily the number of measures designed to tackle certain difficulties in the labour market, and must avoid their misuse. For example, plans to subsidise private sector employers to recruit the long term unemployed through a "minimum activity income", the RMA, are worth implementing, but the contrat d'avenir ("contract for the future", a parallel measure for employment in the public sector) must aim at improving employability among certain categories of the unemployed rather than to increase total public sector employment. Furthermore, the RMA must be subject to a programme of realistic evaluation for cost-effectiveness, based on results achieved. One area where progress has been made is in reducing the incentive for people aged 55 60 to withdraw from the labour force. This progress needs to be maintained and other programmes, such as disability benefits, should not be allowed to become substitutes for the early retirement provisions that have been abolished, as has happened in some other countries.
How can employment protection be counter productive?
Employment protection legislation (EPL) makes dismissing workers on standard employment contracts relatively difficult and expensive in France. For many firms, most of the time, this is probably a minor inconvenience. But it causes significant extra costs for firms in difficulty or facing fluctuating market conditions and over time it has contributed to an unwillingness to hire, especially in uncertain times. The expansion of short term contracts, which represent about 13% of total employment, has allowed some increased flexibility, but conditions attached to these contracts mean that they do not often lead to long-term employment and may have encouraged a dual labour market to develop.
The government should work to change the counterproductive approach of placing the major part of the burden of protecting workers against economic fluctuation on employers, by relaxing EPL on the standard contract. Having a number of different types of contract, each designed to allow some flexibility but heavily circumscribed in their application, makes for costly complexity. The current situation is paradoxical: despite substantial assistance to the unemployed and strong apparent employment protection, employees feel great uncertainty over their future. A number of recent independent reports, as well as reform experience from some other countries, suggest that it is possible to reform EPL without jeopardising adequate job security. One way to increase both flexibility and security of employment, while reducing the current complexity, would be to absorb the different contracts into a single standard contract with the degree of protection varying with length of service, while reinforcing measures to help the unemployed find new jobs. Such a single contract would naturally have to be designed so as to maintain the gains in labour market flexibility that the development of fixed term contracts has permitted. Given the high degree of support for the unemployed in France, very strong employment protection should not be necessary if labour market institutions can adapt to help displaced workers find new jobs. Implementation of a major reform would need to deal with the problem of transition; people now employed in jobs with the current high level of employment protection would be fearful of losing out. This obstacle would make it difficult to move quickly without first developing a consensus that such a reform is needed. The government should seek, to establish such a consensus; the recently created Conseil d'orientation pour l'Emploi, should allow such a debate and thorough analysis of these questions.
The public employment service already has plans to try to simplify procedures facing unemployed people as they seek new jobs. The government should ensure that the proposed maisons d'emploi do not add another layer of administration to the already numerous agencies responsible for different aspects of labour market policy, and that they lead to one-stop shops for employment services, which should provide adequate cost effective job-search support and offer the possibility of active labour market measures targeted on individual needs. This may not be feasible without merging some of the main institutions, notably the ANPE, the national employment service, and the UNEDIC, responsible for managing unemployment insurance. The relatively generous level of social benefits means, as mentioned earlier, that material incentives to take jobs at low pay can be quite small for an unemployed person. Therefore, to improve labour supply, eligibility conditions for unemployment benefits should be tightened up for those who do not actively seek work or refuse jobs offered to them too often. Provided such measures are not implemented in an arbitrary fashion, the objection that this involves an unacceptable degree of compulsion can be countered by the argument that the obligation to take up a job (otherwise losing transfer income) is the counterpart of the obligation on society to support them when they are without a job. Such policies are successful in a number of OECD countries.
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