Reversing the unemployment trend before the end of the year: possibility or illusion?

Summary:

– The number of job seekers in France reached 3.279 million at the end of June 2013, exceeding the level recorded in January 1997. Young people and seniors are the most vulnerable to unemployment.

– Labor costs and the gap between these costs and productivity are a major obstacle to employment, particularly for the least qualified.

– There has been no change in wages in response to the rise in unemployment, with adjustments being made in terms of quantity rather than price.

– With growth forecasts at virtually zero, it is difficult to imagine a reversal of the unemployment curve by the end of the year.

In May 2013, unemployment finally stagnated after two years of consecutive increases (+11.5% over the last twelve months). The number of people registered in category A [1] with Pôle Emploi (the French national employment agency) stood at 3,279,400 [2] on that date, which is about a hundred more than the previous month (+0.0%). The simultaneous rebound in industrial production (the manufacturing PMI [3] index rose to 48.4 in June from 46.4 in May, its highest level in 16 months) and temporary employment helped stabilize the number of job seekers this month.

In the first quarter of 2013, the number of category A job seekers stood at 3.224 million, exceeding the peak of January 1997 (3.195 million). At the end of June 2013, the unemployment rate stood at 10.9% of the working population in mainland France, as defined by the ILO, a level previously reached in 1998. It should be noted that since the reforms on raising the legal retirement age, the working population has automatically increased.

On June 4, the International Monetary Fund lowered its growth forecasts for France (-0.2% compared to -0.1% in 2013 and +0.8% compared to +0.9% for 2014) [4] and indicated that it will be difficult to reverse the rise in unemployment by the end of the year. Indeed, according to the consensus, unemployment will begin to decline once GDP growth reaches at least 1.4% [5] (Okun’s estimate). The IMF argues that the main risks to these forecasts lie in the fragility of the growth outlook at the European level.

Nevertheless, the institution has highlighted the « significant progress on the structural reform front, » which must be maintained and expanded. The IMF calls for more competition in goods and services markets and lower labor costs for the least skilled workers in order to reduce the gap with their productivity by making contracts more flexible if wage adjustments are not feasible.

The International Monetary Fund forecasts a slight recovery in job creation in the second half of the year and a reduction in the unemployment rate in the last quarter thanks to the development of multiple back-to-work assistance schemes rolled out since the beginning of the year, such as jobs for the future, jobs for the elderly, and tax credits for competitiveness and employment aimed at businesses.

Nevertheless, is the goal of reversing the unemployment curve before the end of the year still achievable? Have the measures to combat unemployment had the expected impact on employment levels?

1. Seniors and young people: the first victims of rising unemployment in France

The unemployed are now experiencing longer periods of unemployment than usual. For all age groups, the length of time spent looking for work has increased over the last five years. The number of long-term unemployed [6] rose by 8.3 points to 40.2% in May 2013 [7] (in categories A, B, and C, seasonally adjusted data).

Seniors and those under 25 face significant difficulties in finding employment. Among the latter, the number of people under 25 who have been looking for work for more than a year has doubled over the last five years, rising from 74,200 to 150,000 in May 2013, or 19% of this category. Nevertheless, proportionally, there are more people over 50 among the unemployed than those under 25. At the end of May 2013, seniors accounted for 20.7% of unemployed people in categories A, B, and C, compared to 16.5% for those under 25. They are also more likely to be long-term unemployed. They accounted for nearly 30% of the long-term unemployed (compared with 7.8% for those under 25 in May 2013). In light of these worrying figures, we will attempt to identify the causes of structural unemployment in France.

2. The six factors explaining the French unemployment rate?

The debate on the nature of unemployment has traditionally pitted classical economists against Keynesian economists. According to the latter, unemployment is explained by insufficient demand, while classical economists consider supply constraints to be the main factors explaining unemployment.

According to Keynesian analysis, the goods and labor markets adjust through quantities rather than prices, as prices do not adjust over the short term. Keynesian unemployment is the result of insufficient demand: companies limit their production and hiring because they consider the market for their products to be too small. Conversely, classical economists argue that companies consider labor costs to be too high or labor market rigidities to be too significant.

Identifying the nature of unemployment makes it easier to respond to it. When unemployment is Keynesian in nature, stimulating demand is recommended, while a policy of making real wages more flexible and reducing production costs is more effective when unemployment is classical in nature. However, although the Keynesian view is relevant in the short term and the classical view in the longer term, the two types of unemployment can coexist, which is generally the case.

The causes of unemployment are difficult to identify and measure. However, a non-exhaustive list of explanatory causes of French unemployment can be put forward.

Increase in social security contributions and the minimum wage: the labor cost index, including wages and social security contributions, has risen by nearly 10% over the last five years to reach 109.2 in the first quarter of 2013 [8]. The minimum cost of labor in France is 70% higher than in the United States and 80% higher than the average for OECD countries. The increase in the minimum wage (+9.3% since 2008 [9]) has had a negative impact on demand for low-skilled or unskilled labor.

Support for job seekers: the return-to-work allowance (ARE) is the subject of much controversy. Although it may sometimes appear to offer little incentive to find a job, it remains socially effective in reducing poverty and inequality. According to the COR, a reduction in unemployment benefits would certainly encourage a faster return to work [10]. Since the introduction of the single degressive benefit system, each drop in compensation has been preceded by a recovery in the employment rate, but to a lesser extent than under the previous legislation. A shorter benefit period would have a positive impact on the return to work of unemployed people who were previously in higher-paid jobs. Nevertheless, according to the Employment Policy Council, the personalized support offered by Pôle Emploi would have a significant impact on the length of job search periods.

Employment protection: employment protection legislation (EPL) has an ambiguous impact on the unemployment rate, since by increasing the economic costs of layoffs, it reduces transitions from employment to unemployment but also from unemployment to employment. Thus, the LPE would prolong the duration of unemployment, as companies would be more reluctant to hire when dismissals become more difficult and costly. In addition, excessive job protection would discourage employers from hiring employees they are less confident about. As a result, young workers would be penalized compared to more experienced workers. Finally, while job protection does not have a significant impact on the unemployment rate, it may be negatively correlated with the employment rate [11] in the sense that longer periods of unemployment are likely to discourage and reduce the labor force participation rate of certain groups, such as young people, seniors, and women.

Non-competitive sectors: limiting competition in a sector, particularly through barriers to entry, contributes to higher prices and therefore reduces demand for products from that sector. Investment and innovation in these sectors are limited and productivity gains tend to decline, negatively impacting the employment rate in that sector. The benefits of competition in terms of lower prices increase household purchasing power and reduce entry costs in this sector. The liberalization of protected sectors will not contribute to increasing rents, which will be used to create value.

Deterioration in the quality of the education system [12]: according to the OECD’s PISA survey, this is the cause of the reduced employability of young people, whose unemployment rate is relatively high (25.5% compared with 9.1% for 25-49 year olds at the end of 2012) [13].

Lack of labor market flexibility: since the 2008 crisis, real wages have not fallen in France. In fact, since the beginning of the crisis, the average real net wage in France has increased at an annual rate of 0.8% in the private sector [14] (low inflation coupled with an increase in the nominal cost of labor). The gap between labor productivity, which has stagnated since 2008, and wages is widening. This contrasting trend is a major cause of the deterioration in employment. Companies are reportedly reluctant to reduce their wage practices because they prefer to focus on quantities, i.e., employment, rather than prices, i.e., wages, in order to maintain employee motivation and the social climate, which are essential factors in labor productivity.

3. Measures implemented to try to achieve this

Given the rate of growth of the French working population, 200,000 jobs need to be created each year in order to start reducing unemployment. To try to achieve this, the government has launched various measures to create jobs, particularly in sectors with a promising future.

Jobs for the future: these contracts (permanent or fixed-term contracts of one to three years) aim to improve the professional integration and access to qualifications of young people with few or no qualifications who are experiencing difficulties in accessing employment. The government had planned to fill 100,000 of these positions by the end of 2013 and 150,000 by 2014. As of June 30, only 33,100 jobs for the future had been filled. Employers in promising sectors of the non-market economy are mainly concerned by jobs for the future (environmental protection, personal care, medical-social services, etc.). They receive state aid amounting to 75% of the gross monthly minimum wage for a period of three years. Initially intended for companies in innovative sectors, jobs for the future are now available to all companies in certain regions.

However, these jobs have not been as successful as expected. Today, young people’s access to employment is highly sensitive to the economic climate [15]. These contracts are reminiscent of Aubry’s youth jobs in 1997, which were reserved for unskilled young people fromdisadvantaged areas but missed their target and partly benefited young graduates. In 1992, consolidated employment contracts were created to support beneficiaries leaving solidarity employment contracts, which had been introduced a year earlier.

Generation contracts: this scheme preserves the experience of French companies and brings in new skills through young workers. The generation contract should make it possible to anticipate more accurately the flow of workers entering and leaving the labor market. As a reminder, the number of job seekers aged 50 and over who had not been in work during the month increased by 1.3% on a monthly basis at the end of March 2013 (+17.0% over the last twelve months). Operational since that date, these contracts link the hiring of a young person for three years with the continued employment of a senior citizen through exemptions from social security contributions. The government has estimated that 500,000 generation contracts will be signed during François Hollande’s five-year term. However, this measure may be hampered by certain economic factors, as companies face an unstable economic outlook for the coming quarters.

The competitiveness and employment tax credit ( CICE) applies to all companies with cash flow needs, which will benefit from lower rates than those offered by cash flow loans. Jean-Marc Ayrault specified that the CICE will represent an annual reduction of 4% in labor costs for 2013 and 6% from 2014 onwards for the salaries concerned [16], while reiterating that France must pursue its objective of moving upmarket in order to regain market share. According to INSEE, this measure should have a favorable effect on corporate profitability and thus save around 15,000 jobs in the first half of 2013. By reducing labor costs, the CICE should enable companies to increase their price competitiveness on international markets and/or restore their competitiveness through greater private investment (non-price competitiveness).

The national interprofessional agreement (ANI) (concluded on January 11, 2013 between employers and the CFDT, CFTC, and CFE-CGC unions) and its transposition into law constitute a first step in labor market reform. This agreement aims to increase labor market flexibility in order to preserve jobs and encourage companies to hire. Companies can now negotiate salary adjustments in exchange for maintaining their workforce. This will make it easier for them to adapt working conditions and restructure during difficult economic times.

The reform of unemployment insurance will provide an opportunity to introduce greater incentives to get people out of unemployment, in particular by increasing the degressivity of benefits or by capping them. The length of time spent looking for a job could also be reduced by lowering the cost of geographical and inter-professional mobility.

Conclusion

The various causes of unemployment show that the fight against unemployment will require two types of reforms: against classical unemployment and against Keynesian unemployment. The former will reduce labor costs, which appear too high, while the latter will attempt to boost demand in order to offer more opportunities to businesses. Real wage growth has been sustained, unlike labor productivity, which has remained stable since 2008, thereby reducing the investment and innovation capacity of French companies, whose margins are at historic lows, which will limit the potential for recovery once the crisis is over.

These measures, the initial effects of which have not been as successful as hoped, should nevertheless be effective over a longer period. The number of jobs created and future jobs should grow at a faster pace at the end of the year. Similarly, the CICE has benefited companies more quickly, but the benefits of the tax credit will tend to fade over time. Measures to promote employment (making the labor market more flexible in conjunction with the development of future contracts, generation contracts, and the CICE) can only be effective, but they will only be fully beneficial in the medium term, starting in 2014.