Download France: historic recession, atypical unemployment

No. 5
March 2010
France: historic recession, atypical unemployment
The lesson from four earlier cyclical downturns and recoveries:
unemployment lags behind activity
2
What GDP growth rate will reduce the unemployment rate?
3
After a great recession, an atypical unemployment dynamic?
4
The challenge for economic policy: how to stimulate employment?
8
Four conclusions
9
Will the nature of the Great Recession cause an atypical
unemployment dynamic?
While France reported its third consecutive quarter of positive GDP growth in Q4 2009, with output up
0.6% qoq, the latest employment figures nevertheless remain glum. In January, the number of job seekers
registered with the French Employment Agency (Pôle emploi) came to 2,664,600. This was 19,500, or
0.7% higher than at end-December and 16.1% higher than a year before. This raises several major
questions: How long will it take for the unemployment rate to fall? What GDP growth rate will be
required to reduce unemployment? And will unemployment continue during a long time to be affected by
the Great Recession of 2008? Historically, the improvement in economy activity works into the
unemployment rate after a lag of 12 to 24 months. But, given the extent of the shock and the softness of
the recovery so far, the lag will be longer this time. The results of the Okun equations suggest that while
the GDP growth rate required to stabilize the unemployment rate in France has indeed been lowered in
recent years, it remains high (at 1.7%), and higher than foreseeable GDP growth. Still, despite this highly
hostile economic environment, the deterioration of the labor market has remained particularly moderate,
but it will take longer to reverse than in previous upturns.
T
he scope of the French economy's recession in
2008-2009 raises questions regarding impacts on
the labor market, and the persistence of those impacts.
During the recent recession, the unemployment rate
increased by 1.5 point between the first quarter of
2008 (the peak in activity) and the first quarter of 2009
(the low point in activity), while GDP fell by 3.5% in
the same period. In other words, the increase in the
unemployment rate appears to have been relatively
moderate compared with the size of the downturn. On
average, for each one-point fall in GDP, the
unemployment rate increased by 0.4 point.
The French economy now appears to have emerged
from recession. The latest French GDP growth
figures confirmed the continuing recovery in the
fourth quarter of 2009, with a 0.6% qoq increase,
after 0.2% qoq in the third quarter. But at the same
time, the unemployment rate continued to rise,
reaching 9.6% in the fourth quarter of 2009 for
metropolitan France according to the statistics
published by Insee. The data published by Eurostat
indicate that the unemployment rate has continued
to increase in early 2010, reaching 10.1% in January
(with DOM)
In the current recovery after a deep recession, four
questions arise: (i) How long will it take for
unemployment to respond to the recovery in
activity? (ii) What GDP growth rate is required to
lower the unemployment rate in France? (iii) Will
the nature of the Great Recession cause an atypical
unemployment dynamic? (iv) And finally, how can
employment be stimulated?
Eclairages Recherche by: Olivier BIZIMANA and Axelle LACAN
olivier.bizimana@ @credit-agricole-sa.fr ; [email protected]
Web site: http://www.credit-agricole.com – Economic Research
The lesson from four earlier cyclical
downturns and recoveries: unemployment
lags behind activity
e. The "great recession" of 2008: we date the start
of the recession to the first quarter of 2008.
Unemployment accelerated in the fourth quarter of
the year (from 7.4% in Q3 2008 to 7.8% in Q4,
then 8.6% in Q1 2009). France emerged from
recession in the second quarter of 2009. To date,
unemployment has shown no signs of falling.
To understand the lag between activity and
unemployment, we will briefly analyze the recent
cyclical downturns and recoveries in France.
Table 1. Cyclical upturns and unemployment
In each episode, it took time before the economic
recovery impacted unemployment.
a. The oil shock in 1974: The trough in GDP
occurred in the first quarter of 1975. Unemployment
accelerated starting in the second quarter of the
same year. In the summer of 1975, France had over
a million job seekers. The French economy emerged
from recession in the third quarter of 1975, and
unemployment fell a year later.
Peak in
activity
Exit from
recession
Type of
recovery
Q3 1974
Q1 1980
Q1 1992
Q1 2001
Q1 2008
Q3 1975
Q1 1981
Q2 1993
Q3 2001
Q2 2009
V
V
V
W
√ (forecast)
Fall in unemployment
Start
Q3 1976
Q2 1981
Q3 1994
Q3 2003
?
Lag (quarters)
4
1
5
8
?
Source: C.A. ; * Crédit Agricole S.A. 2010-2011 Forecasts
The unemployment dynamic as an economy
emerges from recession can depend on the shape
or the intensity of the recovery.
b. The second oil shock in 1980: In France, activity
peaked in the first quarter of 1980 and then slowed
sharply. France exited recession in the first quarter of
1981, and unemployment began to fall in the
second quarter of the year.
To assess this factor, we have defined three shapes
of recovery: V-shaped, W-shaped, and √-shaped.
We have characterized as a V-shaped recovery a
period of four quarters of positive GDP growth
following a recession (or near-recession as in 2001).
If GDP falls before rising for four consecutive
periods after a depression, we will use the term Wshaped recovery. Finally, if the rate of GDP growth
is lower than before the downturn and growth does
not accelerate, we will speak of a √-shaped
recovery.
c. The 1992-1993 recession (oil shock following
the first Gulf War, German reunification, and
tensions in the European Monetary System). We date
the start of the recession to the first quarter of 1992.
Unemployment started rising from the fourth quarter
of 1992. France emerged from recession in the
second quarter of 1993, and unemployment began
to fall in the third quarter of 1994.
In a V-shaped recovery, it takes about one year, on
average, before the improvement in activity
d. The near-recession of 2001 (with the collapse of
impacts the unemployment rate (as in the
the Internet bubble): The GDP trough occurred at
recessions of 1974 and 1992). In a W-shaped
the end of 2001. The French economy did not have
recovery (after the near-recession in 2001), the
a "technical" recession (two straight quarters of
decline in the unemployment rate takes longer to
negative GDP growth), but activity slowed
react (two years). The French economy has not
significantly. The economy picked up in the third
previously experienced an √-shaped recovery; but
quarter of 2001, but experienced a second dip.
according to our forecasts, this is the shape of
Unemployment began falling two years later.
recovery we are currently experiencing. A relatively
long period should
France: Exiting recessions and changes in unemployment
therefore be expected
y-y, percentage points
y/y, %
before the upturn has
1,9
Oil shock of 1974
an
impact
on
5,4
unemployment, in the
1,5
Recession of 1993
4,4
current context.
2nd oil shockof 1980
Near-recession
1,1
of 2001
3,4
0,7
2,4
1,4
0,3
0,4
-0,1
-0,6
-0,5
-1,6
-0,9
This
analysis
is
corroborated by the
estimation of the GDP
growth rate required to
reduce
France's
unemployment rate.
-1,3
-2,6
Great recession
of 2008
-3,6
75
77
79
81
Sources: Insee, CA
No. 5 – March 2010
83
85
87
89
91
GDP, y/y, % change
93
95
97
99
01
03
05
07
-1,7
09
Unemployment rate, y-y, percentage points, (rhs)
2
What GDP growth rate will reduce the
unemployment rate?
The relationship between GDP growth and the
change in the unemployment rate is generally
described in the literature by Okun's Law. 1 The
basic Okun equation examining the correlation
between changes in GDP and changes in the
unemployment rate is expressed in the following
form:
ΔUt= α + β *ΔGDPt
Where ΔUt is the change in the unemployment rate
and ΔGDPt is the change in GDP.
Parameter β is called Okun's coefficient. It takes a
negative value, because acceleration in GDP growth
corresponds to a decline in the unemployment rate,
and a decline or slowdown in activity raises the
unemployment rate. The ratio "–α/β" gives the
GDP growth rate consistent with a stable
unemployment rate. In other words, it is a "critical
threshold" identifying the rate of growth in output
needed to hold the unemployment rate unchanged.
Table 2. Estimation of long-run Okun coefficient
∆U= α + β∆ ln(PIB)+ε
Period of estimation: Q1 1970 - Q4 2007
Country
α
β
R²
-α/β
Germany
0.18
(4,82)***
0.17
(5,76)***
0.06
(-1,47)
0.55
(8,87)***
0.26
(9,26)***
0.24
(5,29)***
0.33
(6,75)***
0.06
(3,04)***
-0.06
(-4,91)***
-0.06
(-4,21)***
-0.02
(-1,51)
-0.18
(-10,51)***
-0.13
(-12,92)***
-0.09
(-5,87)***
-0.11
(-7,93)***
-0.01
(-3,37)***
0.28
3.04
0.18
3.05
0.02
3.16
0.51
2.99
0.68
2.03
0.55
2.51
0.52
3.00
0.11
4.22
France
Italy
Spain
EMU (a)
UK
US
Japan
Source: CA estimate.
Student's T in parentheses.
*** (**, *) significant at the threshold of 1 (5, 10) %.
U: unemployment rate; GDP: real GDP; β=Okun coefficient
-α/β: real GDP growth rate required to reduce the
unemployment rate. (a): period of estimation: 1991-2007
1
Okun's law is more a stylized fact than a theory. Working from
US data for the 1948-1960 period, Arthur Okun showed that zero
GDP growth was associated with 0.3-percentage point increase in
the unemployment rate. See A.M. Okun (1962), "Potential GNP:
Its measurement and significance," Proceedings of the American
Statistical Association.
No. 5 – March 2010
Estimating the long-run Okun coefficient
Table 2 sets out the estimations of the Okun
equations for France and the other large euro zone
economies (Germany, Italy and Spain), the UK, the
US, and Japan for the 1970-2007 period.
• In France, according to the results of the
estimations, one quarter of zero GDP growth (β=0)
is associated with an increase in the unemployment
rate on the order of 0.17 percentage point in the
quarter.
• The GDP growth rate compatible with a constant
unemployment rate is on the order of 3.1%. GDP
growth higher than that rate coincides with a decline
in unemployment, while a slower growth rate leads
to a rise in the unemployment rate.
To summarize, the value of the Okun coefficient
indicates that each percentage point above 3.1%
("–α/β") is associated with a decline in the
unemployment rate of 0.06 percentage point ("β").
The results for France are similar to those for
Germany. On the other hand, zero GDP growth in
the US and the UK leads to a larger increase in the
unemployment rate than in France or Germany:
each point of growth above the critical threshold
creates more jobs in the US and the UK
(approximately 0.3 percentage point) than in France
or Germany (0.17 point). This is due to greater labor
market flexibility in the US and the UK, where firms
adjust their workforce more readily to changes in the
economy.
The increase in the Okun coefficient in the recent
period
The estimation of the Okun equations in the recent
period (1997-2007) indicates that the characteristics
of French economy, and more generally of the other
European countries of comparable size (Germany in
particular), have changed (see table 3):
• The GDP growth threshold above which the
French economy creates jobs has decreased from
3.1% to 1.7% since the end of the 1990s.
• The Okun coefficient has increased: for each
percentage point above the critical GDP growth
threshold ("–α/β"), the reduction in the
unemployment rate is on the order of 0.13
percentage point, compared with 0.06 point before.
In other words, the French economy's employment
intensity has risen.
To summarize, the results of the Okun equations
suggest that France now requires GDP growth of at
least 1.7% to reduce the unemployment rate.
3
Table 3. Estimation of Okun's coefficient
in recent periods
∆U= α + β∆ ln(PIB)+ε
Period of estimation: Q1 1997- Q4 2007
Pays
Germany
France
Italy
Spain
EMU
UK
US
Japan
α
β
R²
-α/β
0.17
(3,25)***
0.22
(3,51)***
-0.04
(-1,54)
0.66
(2,63)**
0.19
(6,78)***
0.23
(3,09)***
0.29
(2,86)***
0.07
(2,84)***
-0.12
(-4,82)***
-0.13
(-4,91)***
-0.05
(-2,53)**
-0.23
(-3,59)***
-0.11
(-10,42)***
-0.10
(-4,45)***
-0.10
(-3,44)***
-0.05
(-4,45)***
0.47
1.43
activities with low productivity gains (construction
and services); (2) government policies on
employment (e.g., reducing employer contributions
on low-wage workers, measures to promote parttime work, subsidized jobs, and the reduction in the
"legal working week,"); and (3) greater recourse to
temporary employment (agency workers, and fixedterm contracts).
8
0.39
1.74
0.15
-0.95
0.29
2.91
France: Productivity gains
y/y, %
7
6
5
4
3
2
0.72
1.64
1
2.28
-1
0
0.17
0.43
2.97
0.31
1.41
71
75
79
83
87
91
95
99
03
07
Hourly productivity gains
Productivity gains per worker
Sources : Insee, CASA calculations
France: Productivity gains per worker, by sector
Source: CA estimate.
Student's T in parentheses.
*** (**, *) significant at the threshold of 1 (5, 10) %.
U: unemployment rate; GDP: real GDP; β=Okun coefficient.
-α/β: real GDP growth rate required to reduce the
unemployment rate
However, as seen above, when the economy
emerges from recession, the response of the
unemployment rate depends on the shape of the
recovery (V, W or √). Another factor is the nature of
the shock, as recessions triggered by financial crises
generally affect the level and/or rate of growth of
potential GDP, and therefore on structural
unemployment. 2
What explains the increase in Okun's coefficient
since the 1990s?
The increase in Okun's coefficient reflects the rising
employment intensity of growth in France since the
1990s. In other words, productivity per worker has
slowed considerably in recent years, with average
annual productivity gains over the 2000-2007
period coming to 1%, compared with 1.5% in 1990
and 2.2% in 1980
Even taking account of the reduction in hours
worked, productivity gains have slowed. Hourly
productivity gains decreased from an average of 3%
a year in the 1980s, to 1.9% in the 1990s and 1.6%
between 2000 and 2007. This is attributable to
several factors: (1) the increase in the share of
10 y/y, %
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
71
75
Total
79
83
Industry
87
91
95
99
Services (mainly business)
03
07
Construction
Sources : Insee, CASA calculations
After a great recession,
unemployment dynamic
an
atypical
The typical labor market adjustment sequence
In periods of uncertainty, firms' behavior
contributes
to
limiting
the
increase
in
unemployment rate in the early part of a
downturn.
The initial stage in a downturn is marked by labor
hoarding, as businesses prefer, in the near term and
provided it is possible, to retain their workers, in
order to preserve their human capital (or know-how)
within the firm and avoid subsequent hiring and
training costs.
In a downturn, firms begin by reducing agency
workers and fixed-term contracts, and then overtime.
The next step is recourse to short-time work; this
option has been encouraged by the authorities in
France.
2
See European Commission Occasional Paper 49, June 2009:
Impact of the current economic and financial crisis on potential
output.
No. 5 – March 2010
4
The sequence of labor market adjustments to a
downturn could be represented schematically as
follows:
The chart below tracks the three variables of
adjustment available to firms in a downturn, when
they seek to adjust their workforce without
terminating permanent employees, during the
Great Recession.
France: Overtime, agency workers and short-time work
Millions
Thousands
700
200
1
600
190
500
1. Reduction in temporary employment
180
400
2
300
Adjustment in temporary employment is not costly
for firms to implement, as it can be done by not
renewing existing contracts. There are two reasons
the reduction in temporary employment occurs
before a reduction in hours worked, which is also
very simple to implement. The advantage of
reducing temporary workers is that it does not
impact the take-home pay of the firm's employees.
Releasing temporary workers is also a major source
of savings for firms. France had 668,400 agency
workers in Q1 2008, but only 436,600, or 35%
fewer, as the economy exited recession in Q2 2009.
2. Adjustment in hours worked, by reducing
overtime
Under France's TEPA law (the law on labor,
employment and purchasing power adopted in
2007), claims for exemptions from social
contributions on overtime work came to €2.7 billion
in 2009, including €2.1 billion for employee
contributions and €0.6 billion for employer
contributions. 3 That corresponds to 676 million
hours of overtime in 2009, a 7 percent reduction
from 727 million hours in 2008.
3. Short-time work
Firms have always resorted to short-time work in
times of crisis. The introduction of a government
measure to subsidize short-time work most likely
contributed to greater use of short time work in
France during the Great Recession.
Under the short-time measures, an employer can
temporarily furlough employees or reduce hours
while officially maintaining them in employment.
330,000 employees were on short time at end-2009,
including 15% covered by the APLD (long-term
furlough) measures. The APLD, introduced on
May 1, 2009, raised employee benefits to 75% of
gross wages, while firms in return make
commitments to preserve employment and provide
continuing education.
3
Source: Study by Acoss (Agence centrale des organismes de
Sécurité sociale, caisse nationale des Urssaf), February 2010.
No. 5 – March 2010
170
200
160
3
100
150
0
Dec 07
Mar 08
Jun 08
Sep 08
Agency workers
Dec 08
Mar 09
Short-time work
Jun 09
Sep 09
Overtime hours (rhs)
Sources: INSEE, Labor force survey, ACOSS, CA
4. Only then come adjustments in permanent jobs
If firms continue to face difficulties after exhausting
the options discussed above, they move on to
terminating permanent employees.
The atypical adjustment in employment during the
Great Recession
1. The classical sequence is observed
The following charts illustrate the sequence in the
labor market adjustment during the Great
Recession.
• The chart below details the paths of the four key
variables (agency workers, hours worked, short-time
work, and then the firm's permanent employees)
since the first quarter of 2008.
France: Employment adjustment sequence
Employment and unemployment in downturns and recoveries
t 0 = peak in activity (percentage points)
105
100
95
90
85
80
75
70
65
60
0
1
2
Business sector employment
Hours worked
Source : Datastream, CASA
3
4
5
6
Agency workers
Short time work
7
 In the Great Recession, agency workers are the
variable that adjusted fastest to the shock. This is
consistent with the comments above.
• The next chart shows the variables of adjustment,
exclusive of agency workers, since the first quarter
of 2008.
5
During the recent recession, the paths of both
employment in industry and unemployment were
somewhat atypical, in light of the scale of the
downturn.
France: Employment adjustment sequence (ex. agency
workers)
Employment and unemployment in downturns and recoveries
101
t 0 = peak of activity (perrcentage points)
100
The chart below shows the dynamics
employment in industry in downturns.
99
98
of
97
France: Industrial employment dynamics
96
Industrial employment in downturns and recoveries
95
0
1
2
3
Business sector employment
Source : Datastream, CASA
4
5
Hours worked
6
7
102
100
 The adjustment occurred in the following order:
98
hours worked, then short-time work, and finally
permanent employment.
96
Our labor market adjustment sequence is thus
empirically verified by the Great Recession of 2008.
92
2. But the adjustment in employment should have
been even more pronounced
As seen above, employers have other options
available before terminating permanent employees,
but a continuing downturn can make termination
inevitable.
The different sectors of the French economy react
differently to cyclical downturns. Historically, in
cyclical downturns, employment tends to adjust
faster in manufacturing than in the other sectors,
particularly in the case of exogenous shocks.
Industrial activity is more dependent on the
international climate, investment, and the inventory
cycle, all of which adjust sharply in a recession. 4
This is confirmed by the chart below, which plots
the adjustments in employment by business sector.
Employment in industry is seen to react faster than
in the other sectors.
France: Focus on employment dynamics (ex. agency
workers)
Employment during cyclical downturns and recoveries
102
t 0 = peak of activity (percentage points)
100
98
96
Industrial employment adjusts faster than
employment in others sectors.
94
92
90
0
1
Business sector
Source : Datastream, CASA
2
3
Construction
4
5
Industry (ex. construction)
6
7
Service
4
It is noteworthy that recourse to agency workers is highest in
industry. In Q3 2009, agency workers accounted for 0.5% of
workers in agriculture, 36.4% in the services, and 39.28% in
industry.
No. 5 – March 2010
t 0 = peak in activity (percentage points)
Short time work
94
90
0
1
2
Source : INSEE, CASA
3
4
5
6
7
Shock 1 (Q3 1974)
Shock 3 (Q1 2001)
8
9
10
11
12
Shock 2 (Q1 1992)
Shock 4 (Q1 2008)
This calls for two comments. First, in all three time
periods, industrial employment fails to return to the
pre-shock level, as there are net destructions of
permanent jobs in the sector. Second, during the
recession that began in 2008, the pace of industrial
job destructions was lower than following the 1974
and 1992 shocks.
What factors could explain the relative resilience
of employment in general, and industrial
employment in particular, given the sharp drop in
activity?
The resilience is attributable in part to the range of
measures implemented by the government to
provide direct support for employment in certain
sectors, and to stimulate the overall economy: 5
a. The "zero charge" measure. This exempts
employers from charges on new hires by companies
with under ten salaried employees, when the new
employee is paid the minimum wage (SMIC). This
contributed to creating new jobs.
b. Support for the automobile sector. The French
scrappage scheme granted car-buyers 1,000 euros
from December 4, 2008 through the end of 2009;
the amount has been reduced to 700 euros in the
first half of 2010 and 500 euros in the second half of
the year. The scheme boosted new car sales
significantly. Similar schemes were put in place in
the other European countries. They doubtless
contributed to attenuating job losses in the auto
sector. The French government also released €6.5
billion in low-interest loans for carmakers and
5
For a detailed review of the measures, see Eco News, no. 120,
December 8, 2008.
6
suppliers, in return for commitments
employment, pay and dividends.
on
c. Measures to help firms meet operating cash
requirements, particularly SMEs (e.g., early rebates
of the research tax credit, and moratoria on taxes
and social contributions). The government-backed
development fund for SMEs, Oséo, also provided
support for close to 20,000 businesses, through
loans primarily to meet operating cash requirements.
The French credit mediator, a new position set up
for companies that have been denied bank loans,
mediated with banks to obtain funds that reportedly
saved 151,100 jobs in France, according to a
statement prepared in October 2009; 6 the
arrangement has been extended until December 31,
2010. In addition, SMEs have been helped by laws
imposing maximum terms of payment to suppliers.
The combined effect of these measures has been to
attenuate the impact of the recession on
employment, thus moderating the increase in the
unemployment rate.
France: Unemployment dynamics
Unemployment rate during cyclical downturns and recoveries
2,5
t 0 = peak in activity (percentage points)
2,0
1,5
Employers can begin by increasing recourse to
agency workers, and then increase hours worked by
existing staff, before hiring new staff.
The measures that were successful in attenuating
the negative impact of the recession could delay
the positive impact of the recovery on
employment.
Persistent uncertainty and weak domestic demand
could also delay the jobs recovery, and thus delay the
decline in the unemployment rate. During an upturn,
in light of uncertainties surrounding future demand,
firms generally prefer to increase productivity gains
rather than hire. As a consequence, the jobs recovery
may be too small to reduce the unemployment rate.
The French economy could be facing persistent
unemployment, at least in the short run, while in the
medium term demographic factors will exert pressure
to reduce the unemployment rate. This means that the
structural unemployment rate (defined as the NAIRU,
or non-accelerating-inflation rate of unemployment)
could rise in the near term.
France : unemployment rate and NAIRU
1,0
12 %
0,5
11
0,0
10
-0,5
0
1
2
3
Source : OECD, CASA
4
5
6
7
Shock 1 (Q3 1974)
Shock 3 (Q1 2001)
8
9
10
11
12
Shock 2 (Q1 1992)
Shock 4 (Q1 2008)
3. And the effects will be long-lived…
As seen above, the unemployment rate increased
less than in earlier recessions; it is likely that the
upturn in GDP will take longer before affecting the
labor market.
We saw above the sequence of steps in labor market
adjustment after a shock. The opposite sequence
should occur in the upturn, as firms advance with
caution. Before undertaking new hiring, they will
prefer to use more flexible options which, as seen
above, are easier to adjust if activity is weak.
6
Source: Rapport de la médiation du crédit aux entreprises,
October 2009.
No. 5 – March 2010
9
8
7
87
89
91
93
95
Source : INSEE, OECD, CA
97
99
NAIRU
01
03
05
07
09
unemployment rate
An examination of the past twenty years in France
(see chart) shows that a persistent high effective
unemployment rate translated into an increase in the
structural unemployment rate (1992-1999).
This can be explained by several factors. A high
unemployment rate discourages some individuals
(low-skilled workers, women, young people and
seniors) from seeking employment. The statistics
compiled by DARES (the Labor Ministry statistics
office) indeed show that the number of job seekers
dropping out of the labor market has increased
substantially during the recent recession. The
number of job seekers deregistered by Pôle emploi
(the French National employment agency) because
they stopped looking for work, failed to update their
7
files or were removed for administrative reasons,
increased at an average annual rate of 5.5% in 2009.
As the economy improves, those job seekers who
are no longer counted in the national statistics will
return to the labor market, swelling the effective
unemployment rate. But the employability of
individuals who have been out of the labor market
for a long period of time could be low.
y/y, mm3%
France: Job seeker deregistrations
(exclusing of those rejoigning the labor market)
20
15
10
5
0
-5
-10
98
99
00
01
02
03
04
05
06
07
08
09
Sources: DARES, CASA
What's more, in periods of sharply decreasing
activity, some job positions are permanently
eliminated in certain sectors, and are not reinstated
when the economy recovers. Employees who
occupied those positions often have difficulty
finding work in other sectors, primarily due to
inappropriate skills. This increases the duration of
unemployment and raises the NAIRU.
The challenge for economic policy:
how to stimulate employment?
In light of the atypical changes in employment
during the recent recession, and especially given the
adverse outlook, the question arises as to measures
to stimulate employment.
Structural measures already in place
Several measures intended to improve the
functioning of the labor market have been
introduced in recent years; they should facilitate
labor market adjustment. The "2010-2013 French
Stability Programme" presented at the start of 2010
reviews the structural reforms currently put in place
to promote employment:
a. The creation of a National Employment Agency
(Pôle emploi) by merging several bodies, which
took effect on January 1, 2009, is intended to allow
employers to match up better with job seekers.
b. A new agreement for unemployment benefit
that took effect on April 1, 2009, makes the benefit
period proportional to the contribution period.
No. 5 – March 2010
c. The occupational training reform that took effect
on November 25, 2009, should improve the
mobility and employability of economically active
individuals.
d. The active solidarity income (RSA, revenu de
solidarité active) that was put in place in June 2009
aims to encourage people to work by allowing them
to combine earned income with support including
complementary insurance.
e. Ending above-inflation-rate increases in the
minimum wage (SMIC), by limiting the cost of labor,
is intended to promote employment for low-skilled
workers. Throughout the 2002-2007 period, the
SMIC grew faster than average wages (with an
average differential of 1.9 point a year). 7 By contrast,
over the 2002-2007 period, annual net salaries in
the private sector rose by only an average 0.6% a
year in constant euros, for full-time jobs. The rise in
unemployment that began in 2001 weighed on
wages in the earlier part of the period; a high and
rising unemployment rate works against wageearners during wage negotiations. Increasing the
SMIC at a far slower pace should relax the wage
structure above the minimum wage and thus
increase low-skilled employment.
f. The self-employment scheme (régime auto
entrepreneur) introduced by the law modernizing
the economy passed on August 4, 2008, and which
took effect on January 1, 2009, encourage business
startups (with 500,000 startups in 2009).
Could other options be examined?
Beyond the structural measures already in place, it is
worth analyzing other potential reforms to stimulate
employment.
OECD
periodically
publishes
economic studies; 8 recommendations include the
following:
a. Improving the functioning of the labor market.
In addition to the recommendations already
implemented (e.g., merging ANPE and UNEDIC into
the National Employment Agency, the working tax
credit, i.e., "prime pour l'emploi", and keeping the
minimum wage at a low level) OECD recommends
relaxing laws on indefinite-term employment
contracts, with broader criteria for "termination for
economic reasons”, simplification of termination
procedures, and easing of obligations on employers
to reclassify employees. This would improve labor
flexibility for firms, but it is understandable that it
raises difficulties.
7
Source: Les salaires en France - Insee Références – Édition 2010
(Wages in France, in French).
8
The two most recent relevant publications are: OECD Economic
Studies, France, 2009, and OECD Employment Outlook 2009.
8
b. Raising the senior employment rate, in the
broader context of population aging, with greater
incentives to extend time in employment. In
addition to raising the legal retirement age and
harmonizing public and private sector pension
schemes, OECD recommends pension neutrality,
rescinding measures that encourage early retirement,
and lifelong training.
These reforms would make it possible to increase
the labor force participation rate, and also to
improve the funding of the pension schemes. Insee
estimates that the increase in the number of
economically active individuals, according to ILO
standards, will slow gradually until 2015.9 Then the
economically active population is forecast to hold
steady from 2015 to 2050, at somewhere between
28.2 and 28.5 million, with small annual variations
in either direction. The labor force participation rate
for those aged 15-64 was close to 69% in 2005 and
is forecast to rise by 1.5 point by 2050. The portion
of those 50 and older in the economically active
population should increase from 24.3% in 2005 to
27.3% in 2050, because labor force participation by
those 60-64, after falling for over thirty years, is
expected to rise under the combined impact of
pension reforms and the lengthening of education.
The labor force participation rate of those over 60
years of age is expected to gradually revert to the
level of the early 1980s for men, and to the level of
the early 1970s for women. The portion of those
aged 25-49 in the economically active population
active is expected to fall by 3 points, as the portion
of under-25s remains stable.
In the medium to long term, these demographic
developments would surely reduce potential GDP
and make pension schemes unsustainable in the
absence of structural reforms.
Four conclusions
a. The adjustment in the unemployment rate lags
behind activity. The Great Recession of 2008 is no
exception to the rule. The √-shaped recovery that
we predict argues for a longer lag than in the
previous recessions.
b. The results of the Okun equations suggest that
the GDP growth rate required to stabilize the
unemployment rate in France has fallen in recent
years, and now stands around 1.7%, compared
with 3.1% before.
c. Unemployment will bear the traces of the
historic recession of 2008. While the increase in
the rate was contained, it will be all the more
persistent.
d. This calls for structural measures involving skills
assessments and training for a large portion of the
population. 
----------------------------------------9
See "Projections de population active 2006-2050," INSEE, 2007.
Publication Manager: Jean-Paul Betbèze
Chief editor: Jean-Paul Betbèze — Isabelle Job
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No. 5 – March 2010
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