Thu, Jun 01, 2006 - Page 9 News List

France needs to think beyond traditional welfarism to create jobs

By Brigitte Granville

France's chronic malaise is marked by periodic explosions of protest. The two most recent episodes -- the rioting and arson in French cities last autumn and the successful student campaign earlier this year against a new law governing young labor-market entrants -- seem to have little in common. But their unifying thread is youth, unemployment and uncertainty about the future, as well as suffocating state paternalism.

Take, for example, the desirable goal of job security. French governments have sought it in the only way they know -- by ever more regulation. Unsurprisingly, rules that make it difficult to fire established workers discourage employers from hiring new ones. Insiders enjoy lavish protections, while entry barriers to the millions left outside are insurmountable.

As a result, unemployment is averaging 10 percent this decade and has not been below 8 percent for 20 years. And, while the overall level of unemployment has remained stable -- albeit at a shockingly high level -- the unemployment rate among young men (in the 16-to-24 age group) jumped from 15.3 percent in 1990 to 21.4 percent last year.

France's benevolent paternalism penalizes the young beyond the labor market as well. On paper, wealth redistribution through high taxes and state transfers, reflecting Republican ideals of equality and social cohesion (fraternite), has brought good results. Unlike most other Organization for Economic Cooperation and Development countries, where inequalities have increased over the last 30 years, in France pre-tax income inequality decreased slightly, or at worst remained stable, from 1970 to 2000.

But this aggregate stability masks shifts in income distribution that have favored older age cohorts. Those around retirement age (51-65) saw their share in total income rise by three percentage points in the last 10 years, while younger groups, particularly those aged 18-25, lost ground, with their income share falling by five percentage points. By 1995, relative poverty was increasing sharply for young adults, while the opposite trend occurred among the elderly. In 1970, a quarter of all pensioners lived in poverty; today, the figure is only 4 percent.

Joblessness is the main cause of poverty, and the best protection against it is earned income, for which even France's generous welfare payments are an inadequate substitute. Moreover, the high payroll taxes needed to finance these benefits constitute another deterrent to hiring, as does the high minimum wage, which tends to price unskilled labor above its potential productivity. The relatively generous dole and the prospect of high taxes once in work merely reduces the incentive to take low-paid jobs. As a result, 40 percent of all transfers go to poor but able-bodied people of working age.

The full extent of the French system's pathology becomes fully clear in the light of successive governments' attempts at reform, with piecemeal measures the norm -- and thus proving counter-productive on balance, or failing altogether. Minimum-wage increases, for example, counteract income-tax credits and lower payroll taxes aimed at encouraging youth employment. The unspoken premise is that there must be no losers, not even in the short term.

The logical answer would be to reduce equally the degree of job security enjoyed by the entire labor force. But no French government in recent decades has been remotely strong enough to face down opposition -- often involving illegal action that goes unpunished -- to any reduction in entrenched privileges.

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