Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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 Sub-editor: Véronique Champion-Faure Crédit Agricole S.A.– Department of Economic Research 75710 PARIS cedex 15 — Fax : +33 1 43 23 24 68 Copyright Crédit Agricole S.A. — ISSN 1248 - 2188 Subscription: [email protected] http://www.credit-agricole.com – Economic Research Subscribe to our free online publications This publication reflects the opinion of Crédit Agricole S.A. on the date of publication, unless otherwise specified (in the case of outside contributors). Such opinion is subject to change without notice. This publication is provided for informational purposes only. The information and analyses contained herein are not to be construed as an offer to sell or as a solicitation whatsoever. Crédit Agricole S.A. and its affiliates shall not be responsible in any manner for direct, indirect, special or consequential damages, however caused, arising therefrom. Crédit Agricole does not warrant the accuracy or completeness of such opinions, nor of the sources of information upon which they are based, although such sources of information are considered reliable. Crédit Agricole S.A. or its affiliates therefore shall not be responsible in any manner for direct, indirect, special or consequential damages, however caused, arising from the disclosure or use of the information contained in this publication. No. 5 – March 2010 9