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Labour Market in France

The labor market in France is one that needs some looking into in order to gain a better understanding of the French job market and its trends.

 

The French economic expansion of the second half of the 1990s was characterized by a sharp rise in employment and reduction in unemployment. Employment increased by about 1.8 million people, a record in such a short period of time for France, and the unemployment rate fell from a peak of 12.3 percent at the beginning of 1997 to 8.6 percent in mid-2001. This performance is all the more noteworthy in that output grew less during this period than in previous expansions. Finally, nominal wages were surprisingly sluggish during the expansion and, as a result, real wage growth inched up 1¾ percent from 1997 to 2000. The combination of high employment and relatively modest output growth led some analysts to characterize the
upswing as “rich in employment.”

 

Existing studies suggest that job-rich growth may have been caused in part by changes in the basic parameters of the wage setting mechanism resulting in a rightward shift in a labor–supply like relationship between real wages and employment. Other studies focus on the positive labor demand effects of the cuts in firm’s social security contributions enacted by the French government beginning in 1993. This paper provides direct evidence that the trade-off between real wages and unemployment has indeed improved in France in the second half of the 1990s, which is a direct evidence of a structural improvement in labor market functioning. Such a structural shift accounts for a large share of the job growth associated with sluggish wages observed in the second half of the 1990s, but also implies a pickup in investment rates as the economy converges to its long-run equilibrium. Therefore, abstracting from business cycle effects, the previous job-rich growth phase could be followed by a “capital-rich” growth period. It is shown here that if this moderation is not reversed in future years, the equilibrium unemployment rate will be halved in the long run, although this estimate is subject to some uncertainty.

 

The econometric exercise points to a significant improvement in the trade-off between real wages and unemployment, which is consistent with many factors, including a decline in unions’ bargaining power, increased preference away from wages and towards employment (“wage moderation”), shifts toward more labor-intensive technologies, and reductions in taxes on labor income.

 

Most workers in continental Europe receive wages set by collective agreements negotiated between trade unions and employers, in contrast to the more competitive wage setting prevailing in the Unites States. This does not necessarily imply that the percentage of trade union members among all wage/salary earners is large, since unions may negotiate pay on behalf of the employees irrespective of their affiliation with the unions. Besides, the negotiation can occur at the national, regional or sectoral levels. France ranks as one of the lowest in terms of union membership (10 percent) among the continental European OECD countries, with more than 70 percent of all employees covered by collective bargaining agreements.

 

Not all firms in France are characterized by wage setting through negotiation between unions and firms, though. Abowd and Kramarz (1993) pointed out the existence of the incentive compensation system as a competing regime of wage determination in the manufacturing firms in France. Under this system, the firm and its employees accord on a wage that is incentive compatible, such that an employee’s utility from providing high work effort is at least as great as the utility he could derive from offering normal work effort outside that firm. The wage offer also has to be feasible given the firm’s profitability constraint. The firms that do not reach such an agreement with the employees operate on the labor demand curve using sector-level negotiated wage as given. In a static framework, this arrangement is equivalent to the right-to-manage model, which postulates that firms and unions bargain over wages but firms set employment unilaterally. The authors ruled out the third possibility of contracting regime, namely the efficient
contracting, which implies joint determination of wages and employment. In addition, Abowd and Kramarz did not find any striking difference in the structure of wage determination between the firms with and without accords. So, the right-to-manage model can be used as a reasonable approximation of the way wages are set in France.

 

Firms are assumed to determine employment by maximizing short-run profits given the negotiated wages and the stock of capital. On the other hand, unions take into consideration the employment effects when negotiating the wage.

Source: Iza

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