How to reform the job market successfully

Olivier Blanchard 20 September 2007

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Why must the French job market undergo major reform?

  • The unemployment rate is too high and has been for too long to attribute it to bad macroeconomic policies.
  • Unemployment periods last too long – more than a year on average. When someone is out of work for that long, it often affects them for life.
  • Lastly, there’s an increasingly polarised job market – with the young too often starting their professional lives alternating between small jobs and unemployment, and older workers too often in pre-retirement, or unemployed long-term.

Can we do better? Evidence from other countries clearly says ‘yes’. There are, on the whole, two ways to protect employees. The first is to protect existing jobs. The second is to facilitate workers’ transitions between jobs with improved training and unemployment policies as well as policies that encourage professional mobility. France emphasises the job-protection approach, while economic theory and empirical evidence point strongly to the second approach. As intended, protecting existing jobs slows their destruction, but it also inhibits the creation of new jobs, which has two profoundly negative effects. First, for those unfortunate enough to lose their jobs, it means a longer unemployment period. Second, it causes a reduction in productivity growth, thereby reducing buying power.

The task then is to reduce – or more precisely, to streamline – job protection. In exchange, job transitions and unemployment must be better handled. This could shorten unemployment periods, offer the young more promising career prospects, and let older workers wrap up their careers with more satisfaction. On paper, this seems not only possible, but also infinitely desirable. So why is it so difficult? Because the social partners involved, from employers to unions, are wary of one another, and looking out for their own interests.

Employers are suspicious, especially since they felt they were cheated in the PARE negotiations.1 PARE reform was supposed to make unemployment payments more generous while they lasted but also to give the unemployed incentives to return to work, if such work was available. The reality was different. Unemployment payments did become more generous – requiring businesses to increase their contributions to UNEDIC2. But the incentives to get back to work barely changed.

Labour unions are equally distrustful. When there’s high unemployment, any change that increases the risk of layoffs is difficult to accept. Even if those changes might have favourable effects in the long-run, how do you explain that to employees who lose their jobs, and find themselves once again unemployed – some of them for the long-term ?
Under such conditions, reforms can only succeed if there’s something in it for everyone. For this, the reforms must be both comprehensive, and taken a step at a time. All these steps can be accomplished during the negotiations that will take place up to the end of the year – but it is essential, I think, that they be completed in a specific order.

1. The first step must be to ensure greater security in career paths

In today's economy, a working life is likely to imply many jobs, and may well include periods of unemployment. It is essential that many benefits which used to be associated with seniority in a given company now be associated with seniority on the job market, and that these benefits can be transferred from one company to another. This in turn implies that these benefits must be “mutualised”.

A key component of this career-path security must be access to both training and career advancement assistance. The legal framework already exists, with the "individual right to training" enforced by the Fillon law3. The essential question is the nature of such training. Empirical evidence is very clear on this point: the €25 billion that France spends on training (3 times what it spends on the program of minimum income support, the RMI!) is largely wasted. Many training programs are ineffective, and those which are most effective are often those offered within companies. It is essential to reconsider the structure of training programs, and to implement evaluation processes. This will take time, and can’t be done this year. But the important thing is start the process now.

2. Reforming the system of unemployment insurance is the second step

A system which limits the duration of unemployment benefits is wrong for two reasons. Because for some – those for whom there’s little or no work – the end of payouts can spell disaster, and because it lets others beat the system by waiting until their benefits run out before taking a job that they could have taken sooner.

So, a good system is a generous one, but one that requires the unemployed to get back to work if an acceptable job exists for them. It is this second part that "PARE" anticipated, but which never happened. As foreign experience shows (for example, the Harz reforms in Germany), it is far from obvious how one puts such a system in place. What is the definition of an acceptable job? What about unemployed job applicants who sabotage the interview process? Still, it is certain that we can do much better, and that this must be a priority. In this context, it seems essential to experiment, and to introduce private firms to compete with the French National Employment Agency, ANPE, and to have them evaluated based on their training and job placement record.

Should UNEDIC and ANPE be merged? Probably. The important thing is to have a bureau specifically for the unemployed, one that is in charge of both unemployment benefits and their recipients’ return to the workplace. At minimum, this implies a major streamlining and reorganisation of UNEDIC’s and ANPE’s tasks. If the two remain separate, UNEDIC’s role must be reduced to financing unemployment benefits, while that of ANPE must expand and integrate indemnisation and return-to-work assistance.

3. The third step is to reform the lay-off laws

The lay-off laws must be revised. Their current structure is incoherent, and it has become a source of considerable uncertainty for both businesses and employees.
The fundamental principle must be that a business, better than anyone, can judge the economic justification of a lay-off, whether it be due to reasons with the business situation (bad sales, change in product range, technological progress, delocalisation – what nowadays is called an economic motive), or to reasons involving the specific employee (a disagreement, a lack of confidence – what’s termed a personal motive). The logical implication of this principal is that this economic justification cannot be called into question, even by a judge, for the simple reason that anyone – be it a judge or other outside observer, is automatically less competent than the business to make the call. This principle is in no way incompatible with the requirement that the company specify the cause for the lay-off (which is in any case imposed on us by international treaties). It is completely reasonable that an employee be informed of the reason they are let go.

It is not a question of eliminating the role of judges. An employee who believes their lay-off is due to discrimination rather than to an economic reason must be able to appeal it, and if they are in the right, to receive additional compensation. At the same time, a business that believes an employee has committed a grave error, and therefore does not want to pay him severance, must be able to do so, and if necessary, to defend itself before a judge.

The quid pro quo for this simplification of the judicial process must be an increase in the legal severance payments for lay-offs, whether it be in law, or in collective conventions. These legally mandated payments are small in France, relative to many European countries. They could be higher, to more strongly reflect the seniority of a worker within a company, and possibly to take into account the probability of finding another job at a similar salary.

It is also in this light that it is necessary to rethink the rules governing collective lay-offs and social plans. Requiring businesses to find other jobs their employees is asking them to do something outside their realm of expertise. It would be better to leave this task to specialised firms. But we can certainly ask firms to pay for these services, and to pay more if finding jobs is more difficult or uncertain.

Such a reorganisation can be done within the framework of existing contracts, be they contracts of indeterminate duration (CDI) or contract of determinate duration (CDD). It would reduce the differences between these different contracts. The CDD would differ from the CDI mainly by the size of the severance package. It would therefore be more logical to replace all of them by a single progressive contract (with severance payments that are a function of seniority), at least to reduce the number of types of contracts that exist today. Like changes to training programs, the reduction in the number of contracts is important, but is likewise complex, and can probably wait.

4. The fourth step is to reform financing of unemployment insurance

Presently, unemployment insurance in France is financed by contributions based on salaries. This sort of financing raises costs for businesses, and thereby reduces jobs. The contributions are the same, whether a business lays off employees or not. This is not desirable. The businesses that lay off the most impose a higher cost to society which must, in particular, finance the unemployment benefits of laid-off workers.

There’s a simple way to make businesses responsible, which is to make them pay more if they lay more workers off. This sort of bonus/malus system is perfectly conceivable. Paradoxically (considering the image of the USA in this domain) – it has been the case in the USA for a long time - companies pay, over time, contributions equal to the unemployment benefits paid by the unemployment agency to the workers that they laid off. This gives them more incentives, not only to lay off fewer workers, but to lay off workers who will find work again most easily and who will be unemployed for less time.

An oft-heard objection in this context is that, in such a system, businesses will become more hesitant to hire workers who, if they must be laid off later, will have difficulty finding another job. Or that businesses will hesitate to set up shop in areas of high unemployment, where their workers, if they have to be laid off, risk being unemployed for a long time. In both cases, there’s a simple solution – an explicit subsidy system for the specific categories of workers in the first case, and for particular work areas in the second. The implicit subsidy system, present in the current system, is hardly transparent, and not very efficient.

Ensuring secure career paths, streamlining layoff procedures, creating a more efficient unemployment insurance system and changing the way it is financed - all these reforms are possible, but they can only be accomplished together. Without more secure career paths, it is not likely that unions will be ready to discuss reforms to layoff procedures. Without streamlined layoff procedures, it is unlikely businesses will be open to reforming the way unemployment insurance is financed. The negotiations now starting are an exceptional opportunity – they can lead to the most important reforms of this new French presidency and, with time, lead to lower rates of unemployment, shorter periods of unemployment, and more fairly distributed unemployment. They can also give the young more promising career prospects, and lead to greater growth.

Editor’s note: This article first appeared in French on our Consortium partner’s site http://www.telos-eu.com/

 


 

Footnotes

1 A French return-to-work assistance program, Plan d’aide au retour a l’emploi – Return to Work Assistance Plan (PARE).
2 French national organisation managing unemployment benefit schemes
3 The Fillon law of 2005 was a law that was adopted in France in April 2005 which would reform France’s education system. It is named after François Fillon, the Minister of Education at the time.

 

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Topics:  Labour markets

Tags:  reforms, French job market, career paths

Chief economist, IMF, on leave from MIT