A comparison with the US labour market reveals the institutions that may be responsible for France’s relatively high rates of unemployment.

The ‘moneyless America, jobless Europe’ description of transatlantic labour market differences is well-known and well documented: while US inequalities rose dramatically during the 1980s, the average unemployment rate remained fairly stable. Over the same period, exactly the opposite happened in France: wage dispersion remained fairly stable while unemployment rates almost quadrupled.

Many economists argue that this sharp difference in the employment performance of the two economies is due to institutional rigidities in the French labour market, notably the minimum wage, unemployment benefits and employment protection legislation. In particular, it is often said that French unemployment is tough on young workers who, in seeking to enter the labour market for the first time, suffer from ‘outsider’ effects. It is also argued that low-wage unemployed workers in France are disadvantaged by the minimum wage.

A recent Economic Policy paper by Daniel Cohen, Arnaud Lefranc and Gilles Saint-Paul tests the validity of these claims by comparing the unemployment record of French and US workers. Are low-wage workers suffering relatively more in France than in the United States?, they ask. Do young French workers find it more difficult to find a job? If not, then their poor labour market outcomes may not be caused by institutional rigidities or the behaviour of the unemployed, but by more fundamental features of the French economy.

The research shows that transatlantic differences in unemployment rates are especially acute for young and old workers, but appear to be negligible for middle-aged workers. There are, however, major differences in the pattern of job flows in the two countries: unemployed French workers take five times longer than their US counterparts to find new jobs (the ‘hiring’ rate); at the same time, the French are five times less likely to become unemployed (the ‘separation’ rate).

There are two possible explanations for these differences. One is that wage rigidity makes it impossible for French firms to offer the quantity of jobs available from US firms. The other is that a low rate of separations arises from high firing costs, which in turn depress labour demand.

The authors investigate the pattern of wage adjustment in the two countries. They find that the wage profiles of ‘displaced’ workers (employed people who have recently been unemployed) are actually quite similar: in each country, their wage loss or ‘discount’ is about 10% when entering new jobs. These results, the authors believe, can be interpreted as the equilibrium outcome of two economies in which workers optimally set their wages of entry. While wage rigidity reduces the discount in France, the much lower hiring rate makes workers less picky about new jobs, increasing the discount.

Removing such sources of wage rigidity as minimum wages and generous unemployment benefits would reduce unemployment, the authors agree. But it would also lead to excessive wage losses for displaced workers – much higher than for their US counterparts. Hence wage rigidity is not as central as is usually argued in explaining the US-Europe differential. Instead, the key causes of the difference between the two labour markets are the low hiring and separation rates. These arise from employment protection legislation.

If most of the difference between French and US hiring rates comes from firing costs, what explains the rise in French unemployment after 1973? Firing costs did increase in the late 1960s and early 1970s, but they were always higher in France than in the US. For example, the average unemployed worker waited nine months before getting a job in the France of 1970, compared to 13 months today.

In the end, the difference between the early 1970s (when French unemployment stood at 2% of the workforce) and the early 1990s (when it rose above 10%) can be ascribed to the general slowdown in global economic growth. Nevertheless, the authors conclude, a large part of the difference between French and US unemployment is attributable to an ever-present difference in attitudes towards separation.

These findings are useful in evaluating a number of the policies advocated as a cure for French unemployment. For example, it is often argued that the young deserve special attention because of their high unemployment rate. But short-term contracts have been implemented in France as a response to the demand for ‘flexibility’ in the economy, while protecting middle-aged workers. The key to youth unemployment is not that they suffer from high unemployment duration (they fare better than other groups), but that they suffer from a much higher separation rate. The young are part of the dual labour market that French regulations have created.

The analysis also reveals that one group of French workers suffers much more than its US counterpart: the ‘old’ workers (those over 50 years old), whose hiring rates for the least educated among them are up to 30 times lower than the in US. Although this group is less visible because their numbers are lower, they are the people most badly hurt by the system.

Which labour market institutions are most harmful and should be removed? Cohen and his colleagues find little evidence of unemployment arising from wage rigidity, and the minimum wage seems to matter only for the least educated youth. Firing costs, in contrast, seem to depress the demand for labour substantially, particularly for uneducated labour.

How might these costs be reduced? One way, cutting severance payments, would be politically unpopular. But such reductions could be offset by an equivalent increase (in terms of present discounted value) in unemployment benefits, which seem to have little impact on unemployment. Another possibility is that the legal and administrative costs of firing might be reduced without cutting the level of comp<%-3>e<%0>nsation.

This article reviews research reported in ‘French Unemployment: A Transatlantic Perspective’ by Daniel Cohen, Arnaud Lefranc and Gilles Saint-Paul, published in Economic Policy 25 (October 1997). Cohen is at CEPREMAP, Paris; Lefranc at DELTA, Paris, and the University Paris X; and Saint-Paul at Universitat Pompeu Fabra, Barcelona. Cohen is Programme Co-Director and Saint-Paul a Research Fellow in CEPR’s International Macroeconomics programme.