France takes first steps to defuse 'time bomb'
The French economy’s lack of competitiveness can be traced to labour market rigidities that have contributed to stubbornly high unemployment. Indeed, the unemployment rate has dropped below 8 per cent just once over the last 20 years, while the rate of youth unemployment has never been below 15 per cent over the past 30 years.
Although union membership is relatively low by EU standards at just 8 per cent, a relatively militant leadership tends to dictate labour market terms, which means that any downward adjustment in employment tends to fall disproportionately on young workers on temporary contracts. Labour market duality is amply demonstrated by the fact that the unemployment rate and real wage growth are positively correlated, and as a result, it is no surprise that private business is reluctant to hire.
Further, relatively high wage costs have contributed to a structural decline in profit margins, which has hampered private investment in the productive capital stock. Expenditures on research and development remain marginally above the EU average relative to GDP, but should recent trends persist, this will soon change. All told, a relatively low investment rate could lead to a decline in labour productivity with a corresponding fall in the economy’s sustainable growth rate.
It is widely believed that the political establishment is far too complacent in the face of these concerning trends, such that meaningful supply-side reforms will not be implemented.
However, in response to the commissioned report on competitiveness, the Socialist government announced that it would give € 20 billion of tax breaks to companies in an effort to compensate for the heavy burden of payroll charges.
The measure was less than the private sector had called for and will be phased in only gradually, but importantly; it is to be financed through an increase in value-added tax and a reduction in public spending. The shift in the tax burden away from business and towards the consumer marks an important break in prevailing government policy for at least the past 40 years, and should not be dismissed lightly.
France risks becoming the “sick man” of Europe, but new measures announced by the government represent a step in the right direction. The time for more meaningful reforms is now.