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Cablegate: Unemployment Decreased Mainly Due to Government Programs


DE RUEHFR #4539/01 1811505
R 301505Z JUN 06





E.O. 12958: N/A

1. SUMMARY. Job creation in the private and public sectors was
boosted by an increase in government-subsidized contracts, and
special government incentives. At least 700,000 jobs were created
with the government's support in Q-1, which can explain the decrease
in the unemployment rate to 9.1 percent. The youth unemployment
rate remained high although youth were the main beneficiaries of
government programs. The government still has plans to reform
labor. However, it will be difficult to make any significant reform
before the 2007 presidential elections, especially after the First
Employment Contract (CPE) crisis. END SUMMARY.

Government Measures to Reduce Unemployment
2. Job creation probably occurred in sectors not captured by the
quarterly employment indicator: small companies, the government
sector, and among non wage-earners. The government action in favor
of employment focused on those sectors. As soon as Dominique de
Villepin was appointed Prime Minister last June, he took measures to
boost employment in small companies and to reinforce the "Social
Cohesion Plan" launched by Social Cohesion Minister Jean-Louis
Borloo in 2004.

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Job Creation with New Hire Contracts
in Small Companies Looks Modest
3. In August 2005, De Villepin created by decree the New Hire
Contract (Contrat Nouvelle Embauche - "CNE") that allowed small
companies of up to 20 employees to easily hire and fire new recruits
during the first two years of employment. The government, inspired
by the success of similar programs in other countries, was following
recommendations made by the OECD and the EU commission. Although
the government has repeatedly claimed that 540,000 CNEs have been
"signed" since August 2005, those signatures simply reflect company
plans to hire, not actual hiring. According to the National
Statistical Agency INSEE, the cumulative net job creation related to
CNE was only 10,000 to 20,000 per quarter. Labor economist
specialists Pierre Cahuc and Stephane Carcillo forecast net creation
of 70,000 jobs by the end of 2008. CNEs might have a substitution
effect with other labor contracts, and might also result in lay-offs
before the end of contracts. According to a recent FIDUCIAL-IFOP
survey, CNEs accounted for 16 percent of hiring in small companies
in Q-1 compared with 16 percent and 20 percent in Q-3 and Q-4 2005.
In Q-1, 81 percent of small companies planned to keep employees
after the two-year period.

Government-Subsidized Contracts
Boost Employment of Youth in the Private Sector and . . .
--------------------------------------------- --
4. In the private sector, government-subsidized apprenticeship,
temporary and social insertion contracts boosted youth unemployment.
Apprenticeship contracts increased 6.3 percent to a new high,
382,000, in Q-1, after 241,000 in 2004 and 255,000 in 2005.
Apprenticeship contracts accounted for 3.8 percent in companies with
less than 50 employees and 0.5 percent in companies with more than
250 companies in Q-1. Given this success, the government plans to
develop apprenticeship contracts in universities in order to create
100,000 jobs by 2010. The government was also pleased that 28,984
young people were hired through professional internship contracts,
which combine training with practical, hands-on work experience, in
the first four months of 2006.

. . . Employment of Long-term Unemployed
in the Public Sector
5. The Social Cohesion Plan has been revamped, contributing to
further job creation in the public sector. New
government-subsidized contracts, including future contracts
("contrats d'avenir") and employment support contracts ("contrats
d'accompagnement dans l'emploi"), gradually replaced solidarity
contracts and consolidated employment contracts. About 194,000
long-term unemployed were involved in future and employment support
contracts as of April. The government expected to hire 300,000
individuals under these contracts in 2006.

Government Incentives Encourage Labor and Part-time Work
6. Rather than set aside more funds for direct assistance, the
government has also increased financial incentives meant to
encourage the unemployed to return to the workforce. Starting in
2006, the Earned Income Tax Credit (EITC) has been paid to the
long-term unemployed working at least 78 hours per month over 4
months, and this at the end of the fourth month (no longer with a
year's delay), which is intended to make the EITC more attractive.
Budget funds devoted to EITC were increased by 500 million euros to
3.2 billion in 2006 and could be increased 500 million euros more in
2007. The government, however, has made no comment on the success
of EITC in regards to employment.

7. The 2006 budget also includes income tax-credit (about 1,000
euros depending on income) for youth taking jobs in sectors with
labor shortages (agriculture, retail trade, construction, mechanics,
hotel-restaurants, food), and mobility premiums (1,500 euros) for
the unemployed relocating in order to accept a job far from home.
The government has not reported on the efficiency of this measure.

8. The government extended the use of the Employment Check ("Cheque
Emploi") system, which has been available to individuals, to
associations and businesses, as the number of these actors involved
in services-to-individuals increased 34 percent since February 2005.
More than one million employers use the system, now called the
Universal Employment Check "Cheque Emploi Service Universel
("CESU"), each month. The check represents a very simple way to
ensure the legal employment and payment of domestic and temporary
workers. Its intent was to both stimulate employment and move jobs
from the informal sector into the mainstream. Both employer and
employee benefit, as employers receive tax reductions and employees
social tax benefits. The check has resulted in a net creation of
70,000 jobs in the services-to-individuals sector per year. The
government plans to increase job creation in this sector to 500,000
in three years with the Plan for Services to Individuals, launched
in February 2006.

Government Initiatives to Help the Unemployed
9. The government introduced a proposal ("Convention de
Reclassification Personnalise") to provide personalized help and
financial assistance for up to 16 months to employees laid off for
economic reasons. Since October 2005, 5,000 unemployed entered the
program each month. 31,705 unemployed were still involved in the
program in February, while 10,295 had left because they found work.

10. In January 2006, the National Employment Agency (ANPE) started
to treat job seekers as clients, providing personal advice and
monthly follow-ups. In May, the government, the ANPE, and the
Unemployment Insurance Fund (UNEDIC) signed an agreement to work
closer together. Objectives are to simplify procedures for job
seekers, energize the job search and provide the best service
possible to both companies and the unemployed. The government
planned to open 200 local Employment Centers ("Maisons de l'Emploi")
by the end of 2006. Each center will regroup public service offices
(government, ANPE, UNEDIC) and various partners (local authorities
and missions, chambers of commerce, and adult training
organizations) in the same area. The government's objective is to
increase the number of centers to 300 in order to provide a truly
national network by the end of 2007. Budget expenditures related to
the Social Cohesion Plan will amount to 2.6 billion euros in 2006
and will eventually rise to 13.8 billion euros by 2009 based on
Senate's recent estimates. These estimates do not include cuts in
payroll taxes on low wages, which amounted to 16.3 billion euros in
2004, based on a recent Labor Ministry survey.

The GOF Aims to Reduce Unemployment
to 8.5 percent by the end of 2006
11. President Jacques Chirac stressed that "the continued decline
in unemployment over the last 13 months was the result of government
policy." Minister Borloo, who predicted a decrease in the
unemployment rate to 9.0% by the end of 2006, said that the
unemployment rate could decrease to below 9% as soon as September
and to 8.5 percent by the end of 2006. The Social Cohesion Plan was
originally designed with hopes of reducing the unemployment rate to
8 percent by early 2007. Borloo recently said "we must move towards
7.9 percent," and "the government priority in the next months will
be to reduce youth unemployment."

Head of OECD Employment Division's Insights
12. Raymond Torres, the Head of the OECD Employment Division told
us that France had to increase its employment rate, warning that,
"if it stays at 63.1 percent, problems will remain major." He
suggested that the government follow other European countries
(notably Denmark and Austria) as examples and also proposed
reforming the French social model, adding that "reform will require
substantial movement within the otherwise static French
administration." He warned that, in the long term, the government
would have to make painful reforms, as the budget situation will
gradually become unsustainable due to high unemployment and an

increasingly older population.

Further Government Reform Plans
13. The government failed to implement a new youth employment
policy, the First Employment Contract ("Contrat Premier Emploi" -
CPE), originally created to tackle a double-digit youth unemployment
rate (22 percent on average, and up to 50 percent in the poor
suburbs). The idea was to give employers more flexibility in hiring
young people by extending the probationiary period during which an
employer can fire an employee to two years; under the current
system, which some argue is too hard on employers, the probationary
period is limited to a maximum three months, after which lay-offs
become difficult. The government has developed a new plan to reduce
youth unemployment, but has not yet provided details.

14. Due to the CPE crisis, the government delayed its plan to boost
the employment of seniors. On June 6, the government eventually
introduced a plan to increase the senior employment rate to 50
percent from 37.9 percent over a period of five years. The key
measure of this plan involves the creation of 18-month employment
contracts for those aged 57 and over who have been unemployed for at
least three months. The contract may be renewed for additional
18-month periods. The government elaborated on these measures
before the Economic and Social Council, whose members include labor
union representatives in all sectors. The unions by and large
agreed with the plan, but the leftist CGT and FO disapproved of the
proposal to eliminate the "contribution Delalande", a tax paid by
employers who lay off wage-earners over age 50. The government
deemed the tax "an obstacle hindering the hiring of seniors."

15. The government also commissioned a report on the proposed
reform of social taxes paid by employers to boost employment. The
idea is to base taxation on company value-added rather than gross
payroll expenses, which would theoretically reduce labor costs and
stimulate job creation. However, the joint report issued by the
Finance Minister and Social Security experts warned that such a
reform would create jobs only in the short-term, would slow
investment growth, and would negatively affect France's
attractiveness to foreigners. Within the government, there is no
consensus on this reform.

16. The government has continued its 30-year tradition of boosting
employment with government-subsidized contracts. Based on our
estimate, the government created at least 700,000 jobs in Q-1. The
GOF's objective was to significantly reduce unemployment as quickly
as possible, especially with the 2007 presidential elections
looming. Reforming the labor market will be difficult after the
Government's failure to launch the CPE. GOF programs in favor of
employment have been costly, which hurts the government's other
stated objective to reduce the budget deficit to below 3 percent of
GDP in 2006. The Social Cohesion Plan will ultimately reduce the
government's room for maneuvering in following years. End comment.


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