Fixing Unemployment in France

Policy Memo

Persistent unemployment in France, which is especially high among the youth, is negatively affecting the performance of the French economy. Unemployment is further increasingly turning into a political problem as protests in many cities, under the name of “La Nuit debout” signify the frustration of the French people with the state of politics and the economy. The government needs to act decisively on unemployment in order to regain the approval of the populace.

As is pointed out by the McKinsey report on the French labour market, Frances’ economy faces a dramatic lack of skilled labour alongside rising unemployment (MGI, 2012). As I argue in my report, these two dynamics are interrelated and result from the French industrial production regime. The French economy does not engage in low-skill mass production and therefore does not have the capacity to employ low-skilled workers to a sufficient extent. Industry in France has historically relied on workers with higher skill levels. The vacancies in French industry that are shown in the McKinsey report suggest that the French system of providing education and vocational training to the workforce is malfunctioning. This is leading to rising unemployment of citizens with insufficient or unneeded skills as well as an increasing shortage of adequately skilled labour manifesting in vacancies in French industry.

Therefore, in this report, I will suggest the reformation of the French system of educational attainment and vocational training. The shortcomings of the present system are to be identified as a major impediment to the health of the French economy in general, as well as a major driver of rising unemployment. To provide the service of education and vocational training, it would be most efficient to rely on employers’ associations, but France lacks a close network between employers. This can be interpreted as a coordination problem and should thus be treated as a market failure to be resolved by state intervention. In this endeavour, it is of the essence to ensure an equal contribution by the whole of French industry in order to avoid free-riding of individual firms. I, therefore, recommend the French government to introduce a flat tax for industry and to use the revenue to finance an expansion in education and vocational training. French firms should be given the opportunity to influence the curriculum in order to ensure that the French workforce attains the skills that are required and demanded. This scheme will ensure profitability for French firms by providing the necessary skills to the workforce, circumventing the coordination problem which firms face regarding the investment in education and vocational training. As a result, the increased taxation is unlikely to meet resistance by business as it essentially signifies a necessary investment in the future of French industry.

I further discuss the recent policy initiative of the French government to liberalise the labour market as an alternative policy option. I also make the case that these reforms fail to address the underlying driver of French unemployment which I identify in the shortcomings of the French education system.

Introduction

The public finances of the French state are increasingly pressured by an increase in spending on social services (MGI, 2012). In 2010, public social expenditure reached 32.2 percent of France`s GDP which is the highest figure of all OECD countries (MGI, 2012). This increase is strongly influenced by the relatively high unemployment rate of France, which reached 10.3% in 2016 (The Economist, 2016). Unemployment and low participation in the workforce have expanded to proportions that have led to a recent significant decrease of GDP per capita in France as compared to other European economies (MGI, 2012). In 2012, France was only ranked 11th for GDP per capita among the EU-15 countries (MGI, 2012). This development seriously threatens the stability of the French social security system, especially due to the compromised fiscal position of France. The global economic crisis that hit Europe especially hard in 2011 has reduced tax collection and urged governments to actively intervene to recapitalise the financial sector and induce economic growth. As a result, the French Debt to GDP ratio stood at 98% in 2015 (Bootle, 2015).

Further, President Hollande has made the reduction of unemployment the priority of his term (BBC, 2014) but so far, the situation has not improved. Recent protests, named “La Nuit Debout”, as well as demonstrations against an announced bill which proposes to liberalize the labour market both serve to show the general dissent of the public with the responsiveness of established politics to the demands of the public, as well as the political saliency of the issue of unemployment (Haski, 2016). Especially in the aftermath of the biggest recession since the Great Depression of the 1930s, with most economies in Europe and the rest of the world still in recovery, far from pre-crisis income levels and rising inequality, unemployment is a highly political issue. The rise of anti-EU, anti-immigrant parties constitutes a threat to the very founding features of the European community and may be partly linked to the persistent frustration with the apparent inability of established political parties to effectively respond to social grievances. A sound government response to the alarming rise in unemployment will therefore not only benefit France economically but will further aid in easing societal tensions and reducing general feelings of disenfranchisement in the populace.

The ability of the French government to substantially intervene in the economy is constrained by a multitude of factors. Fiscal policy to stimulate the economy is compromised by the European Fiscal Pact of 2012, as France is trying to stabilise its budgetary position. As a result of the European Monetary Union and the European Central Bank system, France cannot independently engage in expansive monetary policy. Industrial policy favourable to France is severely constrained by several European treaties that aim to form a liberalised European single market (Trouille, 2007).

I argue in this report that malfunctions within the French education system are to be identified as the main drivers of French unemployment. Taking the mentioned constraints on government action into account, I, therefore, argue for an education reform. A new board of education should oversee the creation of employment-oriented skill building institutions and a framework for university-industry- government collaborations (MGI, 2012). This initiative should be funded by a flat tax on French business.

Background on the French Economy

In the pursuit to craft a policy-response resolving the persistent issue of high unemployment in the French economy, it is necessary to produce a clear depiction of the way in which the French economy is organized. In order to provide a policy recommendation that pays tribute to the particularities of the French economy, I will draw on the literature of Varieties of Capitalism (VOC). The VOC Literature argues that countries choose different institutions in order to competitively position themselves in the global economy. The differences in institutions affect economic behaviour and policies, as well as performance and production of goods. This literature, therefore, disagrees with the orthodox economic view that liberal market doctrines are superior and best-practice for every country, which is believed to lead to convergence of countries economic policies under the spectre of neoliberalism (Simmons, Dobbin and Garrett, 2006). VOC, in fact, presupposes that the peculiar institutions of a mature economy are interdependent and complementary, which therefore makes the resulting models of capitalism resistant to change. Institutional Complementarity refers to the idea that a given institution increases its efficiency through the presence of another, complementary institution (Aoki, 1994). Therefore, the effect of an institution is dependent on the institutional setup of the economy as a whole, implying that institutions can have different effects in different settings (Clift, 2004). While this does not mean that change within a given set of institutions is impossible, it does indicate that change will occur within the logic of the given model of capitalism (Hall and Thelen, 2009). Taking the approach of the VOC literature, any effort to reduce the unemployment rate of France`s economy will have to take the particularities of the economic institutions of the country, its interdependence, and interrelations into account.

The VOC approach to economic policy puts the firm at the centre of analysis and investigates how it organizes an array of key relations in its pursuit to produce profits. These include industrial relations, education and vocational training, employment practices, corporate governance and inter-firm relations. The resulting institutions that are formed to coordinate these relationships are the defining features of the different Varieties of Capitalism. Different ways of organizing these relationships result in different comparative advantages in the production of certain goods and services vis-à-vis other countries (Hall and Soskice, 2001). Varieties of Capitalism initially differentiated between two ideal forms of economic arrangement. Liberal Market Economies (LMEs) rely predominantly on competition in order to resolve coordination among economic actors. Firms in LMEs rely primarily on financial markets for the funding of their endeavours, which exerts pressure to generate consistent profits to avoid take-overs (Schmidt 2003). Prime examples of this mode of the organisation are the economies of the US and the UK. LMEs feature low levels of employment and unemployment protection, more short-term employment and little vocational training. This favours mass production based on low skills, low wages, and low product quality. There are few constraints from government or labour, which results in the ability to respond to changing market conditions quickly, and to focus on projects with potential for high yields in short time frames, consequently leading to dominant positions in fields where radical innovation is of importance (Lane, 1989).

In contrast, Coordinated Market Economies (CMEs) rely more on cooperation. Examples of this sort of economy are Germany and Japan. According to Schmidt (2003), CMEs build firm-networks which are connected through supervisory boards, cross-shareholdings and close connections with customers, suppliers and the banks (“Deutschland-AG”). Soskice (1999) points out that banks provide guidance in corporate strategy resulting in more “patient capital” which is more oriented towards long-term profitability than short-term stock prices. CMEs feature high levels of employment protection along with long-term employment, and high investment in vocational training by state and employers (Schmidt, 2003, Hall and Soskice, 2001). This favours production requiring flexible specialization based on high skills, high wages, and high product quality. CMEs, therefore, enjoy a comparative advantage in high- skilled manufacturing, where incremental innovation instead of radical innovation is important (Soskice, 1999, Schmidt, 2003).

Schmidt (2003) argues that France can be categorized as “state-enhanced capitalism”. In post-war France, the state organized inter-firm relations and planned corporate strategies providing credit to businesses (Schmidt, 1996). The state was directly involved in wage negotiations and settlements, which gave it the opportunity to moderate wage rises (Howell, 1992). In the 1980s, the state-centred French model came under increasing pressure from Globalization and Europeanization (Schmidt, 2003) and thus significantly restructured its economic institutions in order to adapt to the new competitive challenges. The reforms pushed France in a more market-oriented direction (Schmidt, 2003). This was accomplished through financial market liberalization, business deregulation and privatization, and labour market decentralization. Schmidt (2003) states that France now has a system featuring relatively high unemployment protection, medium-term employment and middling investment in vocational training. This combination complements the production system of flexible Fordism, which features large-scale production, based on medium skills.

The VOC literature supposes a path-dependency of economies due to the inherent complementarity of their institutions. There is, however, disagreement on the persistence of distinct national patterns of capitalism, as it is often claimed that economies converge on the model of the LME due to pressures from globalisation and financialisation (Blyth, 2003). Increased competition on internationalised markets for goods and services, as well as the integration of the markets for finance, are supposedly reshaping the institutions of every country that is integrated into the global economy (Simmons, Dobbin and Garrett 2006), as the effects of these processes constitute constraints on economic policy. Governments’ fiscal policy, for instance, is increasingly constrained by the need to sustain solid budgetary positions in order to retain access to international finance.

In accordance with Clift (2004), I argue that there is significant change within different models of capitalism, which should not be understood as convergence to LMEs but rather as “hybridisation”. Countries are continuously restructuring their economic institutions in order to adapt to changes in their environment. These changes, however, need to take the interplay of institutions into account in order to avoid friction.

Analysis of the Main Issue

As a result of the restructuring of the French economy mentioned earlier, the French labour market has become increasingly segmented, featuring a well-protected core labour force alongside workers in significantly more precarious employment arrangements (Lallement, 2011). The McKinsey report on French unemployment of 2012 further identifies a growing “mismatch of skills” in the French labour market. While there are increasing vacancies in businesses that would need to be filled by medium to high-skilled labour, there is a growing population of citizens with lower educational attainment and insufficient vocational training. Furthermore, the skills that are being attained are increasingly misaligned with the needs of French business. The combination of these two factors appears to be of the highest detriment to the profitability of French business as the McKinsey report estimates a shortage of 2.2 million high-skilled workers by 2020.

This dynamic indicates shortcomings in the education sector, typical of the French variety of capitalism, that is seemingly unable to provide appropriate amounts of sufficiently skilled workers (Lallement, 2011). French firms rely on the state for the provision of general skills and only provide firm-specific training at the firm level (Boyer, 1995). Due to the weakness of French employers` associations, there is no coordination among firms to provide training for higher skills that are more generalizable (Culpepper, 2001). Firms refrain from investing in training, fearing that a competitor might lure their employees away, thus offsetting the initial investment. This signifies a market-failure which, as I argue, should be addressed by the state.

Workers with lower skills are traditionally more prone to unemployment in any economic setting, but this seems to be a particularly pronounced issue in the French economy due to its production scheme.

The relative absence of LME-type mass-production of low-quality products employing low-skilled labour helps to explain the disability of the French economy to absorb the surplus labour emerging at the lower-skill spectrum. Whereas CMEs also have a lower capacity to absorb low-skilled labour, they tend to provide intensive education and vocational training measures to avoid the build-up of excess labour and to provide a suitably skilled workforce for business. Although France has not specialised in high-tech, high-skilled production to the extent that Germany has, the French production regime of flexible Fordism still requires a certain level of skill which currently seems to be underprovided (MGI, 2012). “The French education system appears to be losing the race to boost skills sufficiently to meet such rapid changes in demand in line with the transformation into a knowledge economy” (MGI, 2012).

Policy Recommendation

Structural reform of the educational and vocational training system of France is required to overcome the related issue of unemployment and insufficient skilled workers. The French state itself cannot efficiently provide education and training on its own since it has insufficient information on the required skills (Cohen and Rogers, 1992) and exact nature of the barriers to cooperation firms face in ensuring sufficient educational attainment. The analysis of Culpepper (2001) therefore suggests that it is necessary to form employer associations capable of resolving their coordination issues to effectively invest in more generalizable skills. French firms are not as closely intertwined with networks of cross-shareholding as it is the case in CMEs like Germany, resulting in less cooperation among them. This represents a peculiarity of the French economy contrasting the CME of Germany, as France relies on competition between firms to a larger extent.

In addition to the lack of information on required skills, the French state is ill-suited to expand and improve educational attainment on its own because of its compromised fiscal position. France signed the EU Fiscal Pact in 2012 (MGI, 2012), which will put significant breaks on its spending ability in the future. France`s debt stood at 98% of GDP in 2015, and the government has committed itself to deleveraging in order to signal sound fiscal policy to international financial markets (Bootle, 2015).

Increasing government expenditure on education and vocational training or on the expansion of public employment is therefore not a viable option to improve the skill of the French workforce. Therefore, I would recommend resolving the coordination problem of the investment in skill-attainment through regulation by the state. The French government should enact a tax in order to create an education fund which will finance the expansion of education and vocational training. This tax should be directly targeted at French businesses, yet simultaneously allow the contributing firms to sit on the supervisory board of education, which will give them the opportunity to contribute valuable input on the nature of the skills they require. The new board of education should ensure the provision of employment-oriented skill building institutions and a framework for university-industry-government collaborations (MGI, 2012).

This would de facto create employers’ associations in the realm of education without requiring them to coordinate and cooperate on their own. Requiring them to fund educational institutions by law, will incentivize business to create the best educational return on their investment, thus providing valuable insight on what skills are needed and how to organize skill-attainment most efficiently. This restructuring of the educational sector is in line with the concept of “hybridisation” (Clift, 2004) as it integrates a feature of CMEs into the economic institutional framework of France.

While this policy recommendation is of more classical interventionist nature, it is likely to be popular among business, as it will ultimately provide skilled labour and thus ensure future profits for French industry. Wolf (2001) provides evidence that businesses favour high-tax environments if they coincide with better service provision and higher human capital.

It is essential to engage in great efforts to prevent individual firms from free-riding on the activities of other firms, however. A flat tax which should leave no room for regulatory arbitrage is therefore required in order to offer French businesses a fair deal. This will enable the business to collectively overcome their coordination problem of investing in a skilled workforce through government intervention.

Alternative Policy Option

The French government has recently proposed a bill aiming to liberalize certain aspects of its labour market, addressing the difficulty that employers face in laying workers off (The Economist, 2016). This rigidity in the hiring and firing process supposedly deters employers from giving permanent contracts to workers and thus feeds the proliferation of temporary contracts and increases unemployment. Many liberal scholars of Political Economy have repeatedly addressed the issue of labour market rigidities in the French economy and argue that it is one of the main drivers of unemployment (MGI, 2012).

Liberalizing the labour market will increase employment in the low-skill sector. The French minimum wage has been growing at a faster pace than the average wage (MGI, 2012), which has most likely lead to a decrease in hiring in the low-skill sector. Still, as I have argued above, the low-skill sector is not the area that France has historically had the highest capacity in, which means that the liberalization of the labour market and the subsequent reduction in unit labour cost will most likely not produce a satisfying reduction in unemployment. Making it easier for employers to lay people off is thus unlikely to be the best course of action for the French government or for the French economy as a whole. Popular protest against the liberalization measures is already forming and seems to significantly increase the political costs of trying to address the issue of unemployment from this angle (The Economist, 2016). Furthermore, as previously mentioned, labour market liberalization on its own will not tackle the apparent issue of an under-skilled workforce. Higher job security incentivizes workers to invest in the acquisition of firm-specific skills. The difficulty for French business to find workers with sufficient and matching skills forms a much greater issue for their profitability than their inability to lay employees off. The “mismatch of skills “(MGI, 2012) must be addressed in order to return the French economy to a more promising path. Reform of the educational sector should be the priority, but it is essential to make sure that people face the right incentives when looking to enter vocational training. A significant reduction in job security is likely to exacerbate the lack of sufficient skills in the French labour force as workers` incentive to obtain education and skills would be diminished.

I, therefore, argue against the recent plans of the government and offer an alternative solution, which will address the most structural issue of an underperforming education system which is persistent in the French economy.

Conclusion

In contrast to the recent plans of the government to make significant steps towards a liberalization of the labour market, a new plan to organize better educational attainment and vocational training is likely to be more popular and problem-oriented. It tackles a fundamental shortcoming of the French economic setup and will resonate with the populace as it sets out to remedy the widespread perception of disenfranchisement and increasing inequality.

The fact that, under the proposed scheme, all firms will contribute evenly, in addition to giving firms the opportunity to share their expertise and articulate their needs is likely to make this program popular among business as well. Although taxation might generally be perceived to result in lowered profits, in this case, it represents a direct investment in increased productivity.

There is a political need to increase the speed and visibility of reforms addressing unemployment. The effect of educational reform on the capabilities of the French industry and business sector is likely to be more medium-term as it will take time to acquire the necessary skills to be productively employed. However, a move to get more people in job training measures, vocational training or other educational institutions would also contribute to an immediate reduction in unemployment, which is undoubtedly politically desirable when one considers the upcoming elections in France.

References

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The Economist (2016) I dreamed a dream. April 9th. Available from: http://www.economist.com/news/europe/21696509- students-are-protesting-against-labour-reforms-would-benefit-young-people-i-dreamed-dream. [Accessed: 24th April 2016].

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2 thoughts on “Fixing Unemployment in France

  1. Too me, your logic seems quite sound, I hope that you have the ear of many of your countrymen and hopefully of a few politicians. I wish you all the very best of luck. I am going to Press this article for you.

    Liked by 1 person

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