The Unassuming Economist

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.