After several years of strong growth during which it outperformed much of Europe, the French economy has slowed. It is still expected to perform somewhat better than the European average this year and next, but now faces the prospect of an ageing population that is already starting to place the budget under increasing pressure. To avoid buckling under a pension and health care “time-bomb”, policymakers will have to act quickly, both to control spending in these areas and to increase France’s potential output. One key step would be to raise the employment rate of youth and older workers which, despite good progress over the past decade, remains low by OECD standards.
The French economy performed well in the late 1990s. Reforms, strong domestic demand, tax cuts, the stock market bubble and more relaxed fiscal and monetary conditions all played a role. Moreover, for a country used to relatively high unemployment, growth was much more job-rich than in the past, as reforms reduced labour costs and the 35-hour workweek legislation helped accelerate the re-absorption of cyclical unemployment generated by the previous downturn. But by 2001, corporate indebtedness, the stock market decline, and the global downturn slowed investment, pushing France into a period of slower growth.
Since then, economic activity has been slack, with (moderate) consumption buoying the little growth there is. Continued weakness in world trade has not helped. On the bright side, employment has resisted the downturn, limiting the rise in joblessness, which was nevertheless too high, at over 9% in May 2003.
Inflation, meanwhile, remains moderate. Despite a pick-up in early 2002 and public complaints that the introduction of the euro lifted prices, competitive pressures and increasing slack saw inflationary pressures subside towards the end of 2002, allowing headline inflation to ease to 1.8% (year on year) by May 2003.
Fiscal policy relaxed massively in 2003, with the general government budget deficit reaching 3.1% of GDP – more than twice the 1.4% originally called for in budget documents. Moreover, the 2003 budget introduced little in the way of measures to reverse these overruns. As a result, the deficit is now expected to reach about 3.5% of GDP in 2003, which in contrast to 2002 is not expected to provide a fiscal stimulus to growth. This, plus a tightening in 2004, will cause consumption demand to expand less quickly in the months to come. However, firms may begin investing again in a less uncertain global environment, and this should help economic activity pick up in the second half of 2003 and into 2004. Real GDP is expected to rise by less than 1% in 2003 before accelerating in 2004 to a rhythm of around 2%.
The relaxation of fiscal policy comes at an unfortunate juncture, with France already facing a looming fiscal challenge from rising pension and health care costs. An ageing population means this challenge cannot be shirked, since in the absence of reform, these costs would increase by as much as 8-10% of GDP between now and 2050. Worse, if measures are not taken to restrain deficits their accumulation over time could double public debt by 2030, threatening the economy’s fiscal sustainability. This underlines the need for early action.
Fortunately, France’s policymakers are not sitting back. Reforms are under preparation or in place, that seek to increase the level and the rate of growth of potential output by increasing labour supply, upping the rate of investment and raising the rate of growth of productivity. The pension system is being overhauled. Further reforms, aimed at slowing the pace of rising healthcare costs, are in the pipeline, as are decentralisation projects, a move towards output-oriented budgeting and various regulatory reforms. A busy agenda indeed.
One area where change would help and where France stands out among OECD countries is its low labour utilisation rate, or proportion of working age people in the workforce. Yet raising employment would speed up productivity growth and raise living standards, and underpin the long-term viability of France’s social welfare system. Moreover, increased employment would simultaneously raise taxable income and reduce government expenditures. Such developments should open the way both to stabilising public finances and to creating the kind of fiscal room that would allow for a reduction in tax rates, perhaps spurring further growth.
The question is, how to get there? France’s low rates of labour utilisation reflect three phenomena: low rates of youth employment; low rates of employment among older workers; and low average hours worked. So, although employment rates of prime age workers (between 25 and 54) are equal to or above the OECD average, less than a quarter of French youth work and only slightly more than a third of 55-64 year-olds have jobs. As for hours worked, the average French employee worked only 1,532 hours in 2001, 14% less than the OECD average.
France’s youth employment was not always so low. It stood at 50% in 1970, declined gradually until the early 1990s, before picking up somewhat. Currently, it stands at less than 25%, nearly half the OECD average of 45%. Although the decline coincided with a 67% rise in educational enrolment rates among 15-24 year-olds, the causality is not clear. Enrolment also rose in most other OECD countries without anything like the associated decline in youth employment seen in France. Economic factors seem to be responsible.
Until recently, the policy response to low youth participation rates per se has been relatively muted. Policymakers concentrated on dealing with high youth unemployment (24% of the youth labour force in 2001) that afflicts the third of this age-group not in school but in the labour force, with a particular focus on the 7.5% of youth who leave school with no or low educational qualifications. A wide range of programmes has been put in place.
On-the-job training programmes, like apprenticeships, qualification contracts and orientation and adaptation contracts, are common. And there are programmes in partnership with both the business and public sectors aimed at assisting youth to enter the labour market, with employment subsidies or provision of personalised job-search and training. Altogether, some 40% of all working youth are involved in one or another of these programmes. Overall, the authorities spend about 2% of GDP on various training and subsidised employment programmes and a further 1% of GDP in the form of tax expenditures associated with the reduction of social charges.
In general, the various apprenticeship and qualification programmes have been most successful in helping less skilled youth find a long-term unaided job. The efficiency of other measures is less clear. The Youth Employment programme (emplois jeunes), which itself employed 213,000 youth (over a tenth of all jobs held by 15-24 year-olds) in public-sector and non-profit sector jobs such as schools, hospitals, and local governments failed to serve as an effective bridge towards long-term employment.
Other programmes have suffered similar difficulties. The French National Auditor (Cour des Comptes) was especially critical of so-called consolidated employment contracts (Contrats d’emploi consolidé, CEC), whose beneficiaries were found to receive neither the training nor individualised assistance provided for in the legislation. Moreover, only 6.6% of participants found work with a permanent contract. In response, the authorities have indicated their intention to consolidate a number of aided employment programmes to improve performance.
To improve prospects in the private sector, and reduce dependency on state-financed jobs, the authorities decided to cease issuing new emplois jeunes and push instead for more assistance to private-sector firms hiring (particularly lowly qualified) unemployed young people. These new Youth Contracts (contrats jeunes) provide private-sector employers a complete exoneration from social charges during two years and a 50% exemption in the third year for each qualifying youth they employ in a full-time contract. The authorities signed some 44,000 such contracts in 2002 and in 2003 and they hope to sign a further 120,000.
Fundamentally, however, no programme can diminish the imperative of reducing rigidities in the French labour market, generally. In this regard, efforts over the last 10 years to reduce impediments to temporary work and fixed-term contracts have been useful, by allowing young workers to gain experience in various jobs, while providing firms with the opportunity of testing prospective employees. Indeed, 75% of those with a fixed term contract are employed a year later, in contrast to the two-thirds of unemployed who remain jobless.
Making older work pay
Unlike youth employment, the cause of the decline in the employment rate of older workers is known, and reflects the introduction of a number of reforms that sought, among other things, to lower unemployment. Most visible of these reforms was the 1982 decision to lower the official retirement age from 65 to 60. This, and associated reforms to the pension system, had the effect of simultaneously reducing the number of years of service necessary to collect a full pension and eliminating the possibility of increasing one’s pension rights by continuing to work later on. Meanwhile, special unemployment benefits and early retirement schemes were extended to older age groups in an effort to promote withdrawals from the labour force.
As a direct result, employment rates of 60-64 year-olds dropped from 35% in 1980 to about 13% in 2001. For men, the decline was particularly fast, with 19% of all employed 55-59 year-olds leaving work between 1980 and 1985 due to early-retirement incentives (including extended unemployment benefits).
Not only did these labour force withdrawal strategies fail to reduce unemployment, they have served to remove a large swathe of French society from productive life. The authorities are responding by putting in place reforms that restore incentives enabling those older workers that wish to continue working to do so. As a first step they have decided to rein in state-financed early retirement programmes, by refusing new applicants to various programmes. As a consequence of such measures, the share of the 55-60 year-olds enrolled in the various state-financed early retirement schemes has fallen from 16% to 10% between 1996 and 2002.
However, overall progress has been less good because a large share of older workers effectively on early retirement are not in a state-financed programme, but are enrolled in one of the many programmes operated by the social partners which offer extended unemployment insurance benefits with no job-search requirements. As of 2002, some 520,000 older workers benefited from some sort of pre-retirement scheme, fully one third of all 55-60 year-olds. A first step towards reversing this trend was taken in December 2002, when the social partners tightened both eligibility conditions and the duration of its unemployment insurance schemes for older workers.
Nevertheless, the consequences of an individual losing his job and moving into early retirement remain limited. Thus, a 56-year-old redundant worker can receive unemployment insurance benefits up to 75% of their salary for as many as three and a half years, without any job-search requirement. Moreover, this period can be counted in calculating his or her pension. With these conditions, it is hardly surprising to see workers and firms apparently colluding to lay off older workers when it comes to saving money or making redundancies.
Steps to reduce early retirement need to be greatly reinforced, so that state-subsidised early retirement becomes an exception rather than the rule. Indeed, as the population ages the issue will increasingly be not how to remove incentives to retire prematurely but how to revise the tax and benefit system so that those individuals who wish to continue working can afford to do so.
One way is to adopt a more actuarially neutral determination of pension benefits that reflects the period in which a person has actually contributed. Under such a system, individuals who, for instance, find their work difficult could choose to retire early, but with a reduced pension. Surveys suggest that workers would embrace such reforms and the recent government initiatives moves in this direction.
Finally, policy has to do a better job of helping older workers who lose their jobs. Improved training and requalification programmes would help. Perhaps policymakers might also consider subsidising their employment, as they do for younger workers.
OECD (2003), Economic Survey of France, Paris, available on the online bookshop (see link below).
©OECD Observer, No 238, July 2003