Home Analysis Structural economic reforms will build a better future for France

Structural economic reforms will build a better future for France

by bojan

France unemployment rate shows the lowest percentage since the peak of the EU crisis, decreasing to 9.6 percent, lower than the previous year. Also, it‘s the lowest unemployment rate since 2012. High unemployment has been an important issue for France for some time already since it has been higher than the EU average. In France vs Germany opposition, it‘s well above Germany’s rate. Relevant job statistics and percentage figures show that overall employment stayed the same (64.7%) and private sector reached the highest unemployment peak since 2008. This situation shows that French economy should really make some serious changes to create more jobs in general, to lower the French youth unemployment rate. The deepest changes should take place in the private sector, as well as in the hiring /firing policy.

The drop in unemployment in Paris 2017 is a result of economic recovery and gradual, but increasing number of young people joining the labor force every year. For example, the mainland France lowered the unemployment rate by 10 % by the end of the last year, and it even decreased more by June this year. The drop in the unemployment rate was felt among all age groups, but it was the most intense among youth. Despite the fall, it’s still very high if we compare it to some other EU countries.

France has to make radical and thorough reforms to keep France unemployment rate under control. Pushing and accelerating these reforms will enable more flexibility for the labor markets and thus stop the weak opportunities for finding new jobs.

What is the French economic problem?

The first and the most evident is the unemployment. In 2016. the unemployment rate in France was almost the same as in other euro zone countries. But this fact is nothing to be proud of, having in mind that the average EU rate reflects nightmare scenarios of the countries like Spain or Greece. The greatest problem related to unemployment is the unemployment of youth. One in four young French under 25 can‘t get a job!

France also tries to discipline the government finances. France is heading a great problem related to the budget deficit and the government debt. However, some kind of improvement has been made since the French Treasury enabled the possibility to borrow at interest rates below zero, which basically means that European Central Bank has intervened with buying euro zone government bond under special, relieving conditions.

Another economic issue to be solved is France economic growth that is very low. France GDP is a rough indicator of living standards of a country, and this one shows poor economic activity just slightly above the peak level at the time of the greatest EU crisis.

The labor market is the essence of the problem. It‘s too expensive to hire or fire workers. France is a classic example of a ‘dual market’ where insiders have higher wages, benefits, and security, and young people don‘t have that benefits and mostly can find part time jobs. This duality must be reduced. Also, social security laws should be changed since France is the country with the most costly social security contributions.

Furthermore, having the largest public sector bears high taxation that cuts incentives to work, invest and save. However, the contrary attitude shows that France actually has a low demand for goods and service and that the labor market reforms won‘t solve the unemployment issue, and what they need is a strong, better-organized economy.

The way out of crisis

Macron‘s greatest challenge is to bring back the dynamic to the economy. Before 2008. France and other EU countries had almost equal growth rates, but today France is lagging behind. Another factor of the crisis is per capita income that only reached some improvement in 2016. The reason for this is the austerity policies that curbed the demand and caused the uncertainty, and the investments have been fewer. The consequences were disastrous! It negatively reflected on the French debt and it deepened the unemployment problem.

And why is the growth stagnating? The reason can be either low productivity or the insufficient number of working hours. The first possibility is immediately rejected since France has always had a stable productivity (even above the US level). Since 2008. it has dropped, but this also happened in other countries due to the global crisis. The productivity profile of France is similar to the most progressive countries like Japan, the US or Germany. It‘s more likely that the reason for stagnation is the labor market. United Kingdom, Germany, Italy accelerated GDP per capita with longer working hours. France, therefore, didn’t record any increase in labor activity. And French inflexible labor market somewhat mitigates the shock. Dismissing workers is very expensive for the companies. In addition, the unemployed lack education and qualifications. So, the unemployment level will remain the same until there are enough skilled job candidates that will respond to the demand of the market.

Possible solutions

French education system must be recreated to be more flexible, inclusive and adaptable, in order to answer the existing needs. The asymmetry of the law creates the uncertainty for the employees. Those who lost their jobs remain jobless for a long period of time due to ‘dual market‘ that protects those with permanent contracts but provides no security to all others. It seems that the new president understands the essence of the problem. He attempts to establish a better balance between flexibility and security. His idea also is to reform the education system in order to make it more flexible and to offer more professional profiles. If he succeeds to convey a real structural reform, France will be facing better times. All changes take time, and they won‘t be easy to convey. It will be even harder with the large bureaucracy that will do its best to retain the existing state of affairs. So everything lies in good timing – if Macron wants to lift up France, he must consistently convey the reforms and fulfill the promises that he made.

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