Cablegate: The Sarkozy Economic Agenda - Labor Market Reform

DE RUEHFR #4327/01 2960822
P 230822Z OCT 07




E.O. 12958: N/A

REF: Paris 4315


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

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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.


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.

© Scoop Media

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