Unemployement: France should follow European ways edit

Feb. 7, 2007

The labour force in Britain has grown by 212 percent since 1851; over the same period, the number of jobs has grown by 212 percent. So - ignoring the business cycle - a market economy always provides more jobs, if there are more people «effectively» seeking work. The issue is how to increase the «effective» supply of labour. So let me focus mainly on the supply side of the labour market and, especially, on the problem of mobilising the unemployed in France. I will accordingly say a little about wage flexibility, which should be central to the demand side, and about skills.

-->There are two big issues here. The first is how to mobilise unemployed people so that they are more effective fillers of vacancies. The second is how to get more people into the labour force. I will start by taking the labour force as given and talking about unemployment. The issue here is: How many people can be employed before inflation starts increasing and economic recovery comes to an end? The problem is that as the demand for labour expands, it becomes increasingly difficult for employers to fill their vacancies. So the number of unfilled vacancies increases, and wages get bid up until inflation starts increasing. At that point we have reached the lowest sustainable level of unemployment.

How much unemployment there is at that point depends mainly upon how effective a system we have for mobilising the unemployed to fill the available vacancies. That is the view which a number of us formed some 20 years ago, and I can illustrate the point from the history of what has happened since then, since it provides a perfect real-world experiment to test the theories which we were proposing in the 1980s.

Around 1990 there was a European boom. Vacancies in most countries rose to levels as high as in the previous boom that had ended in 1980. But unemployment remained high in every country. In some countries this paradox of high vacancies and high unemployment led to a public debate in which it became an accepted proposition that it mattered how unemployed people were treated. It was realised that if unemployed people were paid for doing nothing without being expected to fill the vacancies that arose, there would be higher unemployment. So over the 1990s some countries tightened their benefit regimes and at the same time introduced the principle that after a certain period every unemployed person must be offered activities which he or she must accept as a condition of receiving state support.

In Denmark, unemployment was cut by more than half with no increase in vacancies, and in Britain and the Netherlands unemployment at given vacancies fell by 3 or 4 percentage points. By contrast, France and West Germany made little changes in their policies towards the unemployed. As a result, the European boom of 2000/2001 produced only small reductions in unemployment, while vacancies rose to record levels. It is not often that politicians offer researchers such a neat natural experiment for testing their theories. So the enduring high level of unemployment in France and West Germany cannot be blamed on lack of demand, because we can see what happened when demand was high. It is due to supply-side problems in mobilising the unemployed.

An effective system for doing this must be helpful but also firm. There is a huge variety of systems within the OECD, but the lessons are that an effective system needs four characteristics. 1) Benefits must be paid from the same office that provides job-search assistance and monitors job search; 2) The unemployed person must attend the office in person regularly, and should have a personal adviser who provides active help - which requires a much better staffing ratio than exists in France and Germany today. 3) After not too long a period of unemployment a person should be willing to accept any job that is available; and 4) There should be a maximum period before a person is offered some forms of activity: he must then accept one of these offers. The massive turnover in the labour market should make it possible to secure offers of regular jobs for most workers, if the office tries hard enough.

So which forms of activity is it most useful to provide? The most useful in descending order are: Regular job / Subsidised employment with regular employer / Subsidised employment on a project / Off-the-job training.

There is of course always the controversy over whether a bad job is better than no job. My answer is a firm yes. The pain caused by the loss of self-respect is (we find) at least as great as the pain which a person would feel if he lost half his income. So unemployment hits with a double whammy - the loss of income hurts, but so does the loss of self-respect. That is why unemployment is so devastating, and why we would much prefer it if people were in work.

But people also have strong feelings about what kind of work they do. Their job satisfaction depends on their income from work but also on the other qualities of the work: the amount of autonomy, job security, human contact, quiet, and stress. Research on job satisfaction tells us how much this matters. But does a bad job bring less happiness than being unemployed? The longitudinal research evidence shows clearly that ex post most people who get jobs feel better than people who remain unemployed (even if ex ante they did not always expect this). Moreover, when a person works there are also gains to the taxpayer (lower benefits and more taxes) and higher profits to employers.

Thus the key issue for French unemployment is how unemployed people are treated. It is a great pity that the government recently gave more priority to the issue of employment protection, where, as the Jobs Strategy shows, the evidence provides no clear message about its impact on unemployment. It is also a pity that in earlier years there was a misplaced belief that cuts in hours of work or earlier retirement would reduce the equilibrium level of unemployment. There was never any reason to expect this, and all that these measures achieved was a reduction in the amount of work done.


As I read the evidence, France needs a radical re-think about how unemployed people are treated. The central idea must be of rights and responsibilities. The right to unemployment benefits and job-search assistance must be complemented by the responsibility to look hard and to accept work when it is available.