Why is Unemployment in France So High?


WP/94/58-EA
Why Is Unemployment in France So High? by Reza Moghadam

High unemployment is, arguably, the most urgent problem facing the
French economy. In the first quarter of 1994, the unemployment rate stood
at just above 12 percent. Although the slowdown in economic activity has
undoubtedly contributed to a worsening of labor market conditions in France,
the high rate of unemployment cannot simply be attributed to a lack of
demand. The model estimated in this paper gives a NAIRU (nonaccelerating-
inflation rate of unemployment) of 8.2 percent in 1992, only 2 percentage
points below the actual unemployment rate in that year.

Continuously high unemployment, and features of its composition such as
high youth unemployment, suggests underlying structural problems. Although
labor supply has been rather high over the last twenty years, high
unemployment seems to stem from a lack of job creation. Because of labor
market rigidities, demand and supply distortions, such as the twin oil
shocks and the high interest rates associated with German reunification,
have led to persistent unemployment or hysteresis.

Comparisons with other industrial countries, as well as time series
and cross-section empirical evidence in this paper, point to a number of
potential causes of structural unemployment in France. These include the
generosity of long-term relative to short-term unemployment benefits, the
minimum wage, the level of employers' tax wedge, a mismatch of skills, and
the cost of capital.

In November 1993, the Parliament approved a five-year employment plan
containing over fifty new measures, including further reductions in
employers' social security contributions for the low paid, wage subsidies
for young workers, measures to enhance work time flexibility, and increased
funding for government-subsidized employment and training programs.

Many of the above measures will have a positive impact on the labor
market, and the economic upturn should bring about a fall in unemployment.
However, the key question is whether this decline will be faster and more
substantial than during the previous upturn. To ensure this, the paper
concludes that it is necessary to take further measures, particularly in
areas such as labor costs, where only modest progress has been made.
Additional measures that could have an immediate impact include further
declines in employers' social security contributions financed through
reducing the generosity and duration of unemployment benefits and a
reduction in the legal minimum wage, preferably directly, otherwise through
existing employment programs. Other measures to enhance labor market
flexibility in the long run include shifting expenditure from passive to
active labor market measures (for example, job subsidies for the long-term
unemployed instead of unemployment benefits), re-directing labor market
programs from the public sector toward job creation in the private sector,
and introducing tax incentives for profit sharing.