THE SARKOZY ECONOMIC AGENDA - LABOR MARKET REFORM

UNCLAS SECTION 01 OF 02 PARIS 004327 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON ELAB PGOV FR SUBJECT: THE SARKOZY ECONOMIC AGENDA - LABOR MARKET REFORM REF: Paris 4315 Summary -------------- ¶1. (SBU) France's labor market rigidities are a key impediment to stronger growth and lower unemployment. President Sarkozy has dusted off reforms proposed during his time as Finance Minister to jumpstart the French economy. The key labor market initiative is a more flexible contract between workers and employers to replace the existing system of "permanent" and temporary contracts, and is now under negotiation between employers' associations and trade unions. Other proposals include a one-stop government employment department for all job-seekers, a system of declining unemployment benefits and tax exemptions on overtime (approved by Parliament last summer). Replacement of payroll taxes by a "social VAT" is also under consideration. Sarkozy has promised to move forward on his own should negotiations fail to produce meaningful reform by year's end. But his ability to do so will depend on his political momentum through the inevitable squalls that the opposition hopes will blow him off course. This is the second of three updates on the Sarkozy economic program. Reftel covered goods and service market reform. Septel will address fiscal reform. End summary. France's labor market rigidities -------------- ¶2. (SBU) Improving the labor market is one of Sarkozy's major policy concerns. French productivity is high, ranking third among OECD countries in 2004, and unit labor costs have been declining in recent years (-2.2% from 2000-2005). However, the French economy remains shackled by high unemployment and structural impediments. The unemployment rate has fallen since the late 1990s to 8.6 percent according to Eurostat and to 8 percent according to French official statistics. French employees worked fewer hours per year (1564 in 2006) than in most OECD countries. Only 62 percent of all working-age people are employed, with particularly high unemployment among youth and those nearing retirement age. 60 percent of those 55 to 64 were no longer working, with 24 percent of youth aged 15 to 24 unemployed, almost twice the OECD average. France does a poor job of matching education to job opportunities, and suffers from shortages of workers with specific skills ranging from engineers to gardeners. Piecemeal reforms of the labor market have been difficult to implement. Most recently, former Prime Minister de Villepin's attempt in 2006 to introduce a more "flexible" work contract limited to first-time job seekers brought over a million young people into the streets in protest at what they perceived as a loss of job security, forcing him to abandon the proposal. A new work contract to illustrate "flexicurity"? -------------- -------------- ¶3. (SBU) Sarkozy aims to create a French version of Northern European "flexicurity," following other European countries' success in employment gains through flexible labor markets and efficient support for job-seekers. As a first step, he has asked the Employers' Federation MEDEF and France's five major unions to devise a new work contract to make layoffs less costly and burdensome, and to boost employability by providing paid training between jobs. Government sources and the MEDEF tell us that neither employers nor unions are enthusiastic about the single contract as a replacement for the current dual system of less protected short-term and highly-regulated long-term contracts. Other proposals to boost flexibility such as buyouts and voluntary separation packages are also on the table. It is too early to predict the outcome of these negotiations. Regardless, Prime Minister Fillon's social advisor insisted to us recently, the government will move forward with its own measures should negotiations fail to produce concrete results by early 2008. A single government employment service -------------- ¶4. (SBU) Along with a more flexible labor contract, the Sarkozy government is proposing to reform the state-run employment service. Oversight, training and more aggressive placement of job-seekers would be put in the hands of a single government agency to be formed by the merger of the current employment agency ANPE and the unemployment benefits agency UNEDIC. Finance Minister Lagarde said recently the merger should take place in six months to a year. This new department would guarantee benefits of up to 90 percent of salary for a laid-off employee in an initial phase as opposed to 50 percent now, with declining benefits thereafter to create an incentive for reentry into the labor force. Exemptions on overtime -------------- PARIS 00004327 002 OF 002 ¶5. (SBU) Tax exemptions on overtime work were passed in July as part of Sarkozy's initial package of tax cuts and economic reforms. The exemptions took effect on on October 1 and are intended to begin undoing the 35 hour workweek. Critics say that their limitations mean they will have little impact on French competitiveness. Employees working overtime are exempt from personal income tax on those hours, and employees and employers benefit from reduced payroll taxes on overtime work. Companies with fewer than 20 employees will pay no payroll taxes on overtime hours for workers in "low wage" positions. At the same time, for companies with fewer than 20 employees, all overtime will be remunerated at a 25 percent premium compared with the current 10 percent. The government has estimated that these cuts could cost 5-6 billion euros next year. It maintains however that in conjunction with fiscal and product market reforms the overtime measures will help achieve its aim of adding one percent to France's lackluster GDP growth rate. Pension reform -------------- ¶6. (SBU) Sarkozy's proposed reform of the French pension system, though primarily a budget issue, also supports his point that French workers need to work longer to maintain or increase their standard of living. He has proposed requiring 40 years of contributions to qualify for full pension benefits in the public sector, in line with private sector norms. He has also proposed reform of the "special regimes" that allow early retirement with full benefits to a number of once dangerous professions such as railway workers (see septel). The nationwide strikes October 18 dramatized opposition to these changes by those most affected by pension reform; so far they do not seem to have crystallized more generalized opposition to his labor market reforms. A Social VAT? -------------- ¶7. (SBU) The introduction of a social VAT (an increase in VAT rates that would allow the government to cut payroll taxes),first bruited in June, has been shelved, but not abandoned. It is likely to resurface after next spring's municipal elections. A proposal by Eric Besson, State Secretary for Economic Forecasting and Public Policy Assessment, would shift a portion of the burden of social security contributions paid by the employer to a hike in VAT rates, lowering wage costs for employers. Comment -------------- ¶8. (SBU) Labor market reform will be the lynchpin to Sarkozy's economic reform agenda. Absent a loosening of the rigidities in the system, it will be almost impossible for the government to achieve its 5 percent unemployment target by 2012. Business contacts tell us Sarkozy's most important impact has come from his rhetoric in favor of changing attitudes toward work and job security. Should negotiations on a more flexible labor contract fail, Sarkozy will have to expend political capital to push through meaningful change, or shift his emphasis to other aspects of his reform program. An avowed pragmatist, Sarkozy will try to time individual measures and make tactical compromises to try to prevent opposition to individual measures from coalescing enough to block the forward momentum of the reform package as a whole.