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Assessment and recommendations.

Despite the fall in unemployment, a perception of economic insecurity is quite widespread

French people have rather high expectations of their economy. In many respects it meets these expectations, delivering a high overall standard of living for relatively short working hours. Recently, output has been growing, unemployment has been falling and public finances have improved. Nevertheless, it is taking a certain amount of time for this progress to be reflected in public opinion. Poverty is no more widespread in France than in most advanced European countries, yet the public tend to believe that it is. A feeling of pessimism and insecurity has been sustained by persistently high unemployment, often leading to social exclusion, a problem for which the educational system struggles to find solutions. Demographic ageing, long foreseen but whose consequences have not yet been fully addressed, will soon be having a real impact on labour-force developments and public finances. This Survey concentrates on these linked issues--most of which have been raised in Going for Growth 2007--of unemployment, ageing, poverty and social exclusion, with which the new government will have to deal. Short-term economic trends are given less attention, though they merit continuing monitoring. Meanwhile, a quiet revolution in the organisation of public finance has delegated a number of important functions--including many related to poverty and social exclusion--to sub-national levels of government. The Survey also looks at the consequences and challenges of this less well known phenomenon, especially as it interacts closely with the efficiency of government intervention in social and labour-market policies.

Low labour utilisation is at the heart of many problems

Employment is the main means of combating not just poverty, but also individuals' sense of exclusion; it integrates people into society beyond merely providing an income and also enables them to gain experience and accumulate skills. Getting more people into jobs, hence contributing to growth and paying social insurance and income taxes, would provide finance for pensions, health and dependency expenditure and contribute to long-term fiscal sustainability, which is far from assured. While the education system is doubtless partly to blame for poor labour utilisation, especially where young people are concerned, there is a two-way link: its ability to motivate young people would be boosted if the labour market functioned better.

Structural reforms need to be continued

France has implemented some significant reforms to public finance over the last few years, although vigilance cannot be relaxed and further measures are needed. The 2003 pension reform, which increased the contribution period and aligned the civil service scheme on its private-sector counterpart, and the 2004 sickness-insurance reform designed to make health-sector professionals and patients more responsible, have together improved the budgetary outlook. Efforts to modernise State finances, with the full implementation of the new budget framework law, have also been important. Efforts have also been made in respect of the labour market. Notably, working-time regulations were relaxed somewhat in 2003 and 2005, making recourse to overtime easier; a reform of the public employment service, whose results remain to be seen, is also under way. But progress has been much less significant in the case of employment protection legislation. The regulations governing work contracts have been relaxed for small companies with the introduction of a new type of contract (the Contrat Nouvelle Embauche), but this is not available to firms employing over 20 people. A similar option for any firm taking on young people was abandoned after popular protest, but the need to reform rigid labour-market institutions and practices remains. Dealing with economic adjustments by measures designed to insulate the French economy or protect certain jobs or industries is both costly and, in the end, usually ineffective; the restated OECD Jobs Strategy shows that what is needed is to protect people, rather than existing jobs, and to promote work opportunities. Nor can demand-based policies to stimulate the economy solve fundamental supply-side deficiencies; moreover, they undermine public finances. The 2005 OECD Economic Survey devoted a chapter to the labour-market, and the recommendations there remain relevant.

A too-high minimum wage works against efforts to combat poverty

Compared with the median wage, France's minimum wage (the SMIC) is the highest in the OECD. It is often thought of as a means to combat household poverty, although it is not a good instrument for this purpose. It has come to be seen as a wage norm rather than a starting wage, as elsewhere. Given strong increases in the past, the SMIC has risen faster than the productivity of the low skilled. To increase low-skilled employment, the SMIC should grow at much slower rates in the future by at a minimum avoiding discretionary increases. Over a long period the SMIC should rise no faster than the productivity of the low skilled. This would allow for a less compressed wage distribution above the SMIC level that revives the prospect of moving up the income scale. A more considered way of determining the SMIC would make greater use of expert opinion and consultation, as in some other countries (for example in the United Kingdom's Low Pay Commission). Reductions in social charges on wages close to the SMIC have been beneficial for low-skilled employment, allowing it to grow during the 1990s and be maintained by avoiding increases in the cost of such labour during the implementation of the 35 hours legislation. To fight poverty there is a better solution than raising the SMIC and further cuts in social charges. This would use the prime pour l'emploi (PPE), an earned income tax credit, focusing it more directly on poor families. In devising a better combination of these tools, care should be taken to try to keep marginal effective tax rates as moderate as possible over the range of income where benefits are phased out.

The insider-outsider divide on the labour market needs to be tackled

Governments have sought to protect those in work with rules that make it complex and costly to dismiss an employee with a standard indefinite labour contract (the CDI); costs arise notably from uncertainty surrounding ex post judicial decisions on dismissal procedures. Firms have responded in part by recourse to short-term contracts such as CDDs, to help them adjust to shocks and structural change. The resulting dualism sets workers with CDIs against the unemployed and certain wage-earners who remain for a long time in insecure employment. It makes it sometimes difficult to move into a CDI, potentially exacerbating poverty and certainly adding to perceived insecurity, since the risks of getting trapped in the "outsider" category are substantial. The feeling of insecurity does not spare insiders either, as they may fear loss of security even while they benefit from it. Limiting dualism and facilitating labour-market turnover can help people to remain in employment on a more lasting basis, even if some may have to change jobs relatively frequently. Employment protection legislation therefore needs to be overhauled. One possibility is for the government to introduce a single contract, such that protection gradually increases in line with experience with the firm, conserving a role for judicial monitoring to avoid unfair dismissals (such as in the case of discrimination) while leaving the judgment as to the economic relevance of a decision to dismiss one or several employees to the employer alone. But there is a risk that the "single contract" solution could ultimately lead to less overall flexibility than existing arrangements, if the uncertainty that surrounds the level of detail of judicial interpretation remains. If this risk precludes such a comprehensive reform, other ways to ease the legislation on CDIs, such as widening the definition of economic dismissal, simplifying layoff procedures and reducing firms' redeployment obligations, must be considered. Any new arrangements will improve matters only if they provide employers with at least as much flexibility at the beginning of a contract as does the current situation.

The employment rates of older people should be increased

The low employment rate of people over 55 is also partly the result of public misunderstanding of labour market behaviour. Two decades of policies have encouraged workers to retire early in the unfounded belief that this might boost youth employment; employers also adopted this way of thinking. Such policies are being dismantled, yet many related provisions are still in place such as that people over 57 receiving unemployment benefit are under no obligation to search for work. Attitudes towards issues like these are difficult to change: during the 2007 social security budget preparations, talks aimed at scrapping tax exemption on compensation paid by employers when workers over 60 are forced to retire (which most often were in fact voluntary retirements deliberately disguised as compulsory) did not succeed, and the exemption was de facto extended temporarily to all lump-sum payments due at the moment of retirement. Incentives to retire early should be repealed: the waiver of job-search requirements and tax exemptions on bonuses paid at the moment of retirement ought to be discontinued. Apart from the problem of incentives, the difficulty of employing older workers may theoretically stem from a divergence between their productivity and their wages, although this has not been shown empirically. Furthermore, enterprises are probably tempted to buy social peace by laying off older workers in difficult times. Lifelong learning is one way to improve employment prospects for older people, though insufficient on its own. Some measures taken, notably under the National Action Plan for Employment of Older People, such as the announced elimination of the additional tax on businesses that lay off workers over 50, the increase in the surcote, which gives higher pensions to those who contribute for more than the normal number of years, the implementation of individual training rights, and a wide-ranging information campaign to change people's mentalities, have gone in the right direction, though the effects of the new CDD senior are as yet uncertain. However, it should also be ensured that wages of older workers reflect their productivity.

Policies encouraging the excluded and the jobless to find jobs should be made more effective, to curb the persistence of poverty

Poverty is all the more detrimental when it persists over time. The unemployed are entitled either to unemployment insurance, if they have contributed long enough, or to some other form of income. There are nine "social minima", social transfers intended for the poorest groups of people, the main one being the minimum subsistence income (RMI). Entitlements and obligations vary greatly across the various schemes. It is important to harmonise the rights and obligations of jobless and potentially active people, introduce a common system for bringing them back into employment, make looking for work compulsory and target the measures on those most in need instead of on the particular benefit they receive. Harmonisation requires a system in which one single nationwide institution is in charge of all the schemes, which would be much easier if the body providing placement services for the unemployed (the ANPE) were better coordinated with and in the longer run merged with that responsible for unemployment insurance (UNEDIC).

Policies to address the geographic dimension of poverty should focus more on individual needs

The geographic concentration of poverty fosters its persistence, as people living in overwhelmingly poor areas lack access to social networks that might help them to integrate into the economy. The problems in question are made more complex by the fact that people of immigrant origin are over-represented in these areas. To deal with them "zoning" policies involve concentrating resources on such areas without targeting specific population groups. The most developed example relates to education. Targeting resources at education priority areas (ZEPs) has had a positive impact but also gives rise to the wrong sort of incentives. Areas classed as ZEPs are stigmatized; those who succeed leave them, and those who have the choice avoid living there. The schools in question are staffed with teachers who have less experience and are unable to choose where they are posted. A larger proportion of resources should be allocated as a function of schools' needs rather than according to their location. The schools selected in the "ambition reussite" programme can be thought of as a first step in this direction. Furthermore, the system of salary and other incentives for teachers choosing to work in these establishments needs to be better thought out. This approach could be generalised to other interventions, shifting the focus of support more directly onto individuals. Notwithstanding this general approach, there will clearly be occasions when radical, geographically-defined measures are appropriate.

Housing is also central to these problems, both as a reflection of poverty and as a factor potentially contributing to exclusion. Publicly provided low-cost rental housing aims at social diversity, precisely to mitigate the geographic concentration of poverty. But the resulting widespread eligibility for such housing leads to excess demand for it. Even if charging income-related rents meant that financial assistance were given only to people who need it, it is not certain that provision of public housing alone could eliminate homelessness, let alone substandard housing. For given resources, increasing benefits provided directly to individuals as housing assistance (which currently amount to about 0.8% of GDP) would be more efficient. However, if housing supply is partially inelastic in the short run, such assistance inevitably has the generally unpopular effect of benefiting landlords as well. To increase the elasticity of supply, legislation on security of tenure may also need to be revisited; for example, the effect of regulations making it difficult to terminate a lease in the event of non-payment is certainly to reduce overall supply for low-income tenants. Regulations concerning the renting of accommodation must not be such that they depress the supply of private housing. Efforts to provide support for poor families must be continued and focus on cost-effective ways of increasing supply.

The education system plays a vital and difficult role in reducing inequality and also in contributing to potential growth

The education system plays a key role in determining the rates of human capital formation and long-term potential growth and the average standard of living. It also aims to contribute to a reduction in inequality, although this is difficult, since parental influence comes into play at every stage of a child's development. Pre-school education for all children does reduce a large proportion of inequalities and is highly developed in France, where all children are enrolled in public pre-schools at age three, and the beneficial effects on equity seem apparent up until secondary school. Inequalities between students appear to become more marked at secondary level.

Better performance indicators must play a more direct role in the search for improvement by teachers, heads and schools

Educational expenditure per student at secondary level is high compared with other OECD countries. Recent OECD studies do not suggest that the system has any major shortcomings, but there are nevertheless a number of countries that achieve better results with comparable resource levels. To improve results, it is first necessary to be able to measure them properly. Measurements of "value added" already exist and are publicly available for upper secondary schools (lycees), but these need to be improved and extended to lower secondary schools (colleges). Once these measures are available, it will be difficult for schools to avoid responding to any indications of poor performance.

A traditional feature of the French system has been the lack of autonomy given to school heads, at least in public schools. They have little say as to the recruitment of teachers or their pay, while the curriculum is drawn up in some detail at national level. Improving secondary school results will require either that the education authorities be more responsive when a school's performance is inadequate, or that school heads be given more autonomy and made accountable for finding solutions, within the constraints of clear national standards for pupils' achievement. It is difficult to know which approach is preferable, but the OECD PISA study findings would seem to show that it is the systems with the most autonomy that give the best results. Certain reforms and experiments are already giving schools more autonomy, and these programmes should be continued while at the same time gauging their effectiveness.

The role of parental choice and the "carte scolaire" in improving school performance is controversial

The role played by competition between public schools is insignificant. As a rule, following egalitarian principles, pupils are assigned to schools on the basis of set geographic catchment areas (the "carte scolaire"). In practice, a small proportion of well-informed parents do succeed in getting round the constraints of their catchment area, and some upper secondary schools have managed to introduce more or less explicit selection for high-ability children. Furthermore, given the geographic concentration of poverty and exclusion already mentioned, some schools have a very high proportion of difficult-to-handle children, and the social mixing that the carte scolaire is meant to achieve is limited. Both of these phenomena tend to undermine equity and lead to calls for relaxation of the role of the catchment areas and (which need not mean the same thing) greater school choice. Free school choice could worsen the problem of segregation, given the advantage of better-off well-informed families, and lead to cream-skimming by schools. To avoid these problems, fundamental reforms would be needed to ensure that resources allocated to public schools reflect families' choices. In the absence of such reforms, the "carte scolaire" should be retained.

In any event, the responsiveness of the current system, with major decision-making concentrated in the bureaucracies of the regional education authorities needs to be enhanced and badly-performing schools must be given incentives to improve. However, it is unlikely that the ultimate sanction, used in certain countries, of closing schools whose performance remains persistently very poor despite significant efforts to improve the situation, would be acceptable in France.

Higher education suffers from the paradox that, while there is no selection at entry to university, this does little to enhance equity

Passing the baccalaureat--the end-of-secondary-school examination--entitles students to enrol in the university course of their choice (though entry is automatic only for universities within the student's academie of residence). The fact that there is no selection on admission (except in certain special cases) while education is essentially free is responsible for a series of dysfunctions. The best students seek to stand out by taking courses of study that involve selection, i.e. the classes preparatoires and then the grandes ecoles. Others take shorter selective courses aimed directly at learning a profession, as in the higher institutes of technology (IUTs), often going on to take traditional university courses after avoiding the first two years. Graduates of these short courses are very well placed on the labour market, due to the ties established between IUTs and businesses. The IUTs were originally intended for students less well suited to longer and more theoretical university courses, but lack of places on the more expensive IUT courses means that many such students find themselves at university anyway. For want of relevant information, a high proportion enrol in courses with poor career opportunities and are at risk of dropping out and then find themselves badly placed in the labour market. Universities are now developing systems for providing information on course-specific career prospects and are to advise students as to how compatible their choices are with the type of baccalaureat they passed and the grade achieved. This type of information is necessary and useful, but it will not be sufficient to achieve a significant improvement in the distribution of students among courses on the basis of their abilities. Given that the system is already implicitly selective in many ways, selection should be made explicit and introduced for admission to university. High school graduates should not be allowed to enrol in free courses which the university considers them highly unlikely to complete successfully.

Higher education also lacks resources, and they are poorly distributed

Expenditure per student in higher education is low compared with that in other OECD countries, and tuition fees contribute only a small part of the cost of the services provided. Students are slow to complete courses, and the dropout rate is high. This situation is inequitable: the students who benefit the most are those who engage in the most advanced studies, since they will be in the best position on the labour market; their parents, in many cases, have the highest incomes. In addition, increasing the input of public resources will be difficult, given the foreseeable pressures on the budget. But higher tuition fees could provide funds to improve the quality of higher education. Such fees should be gradually but significantly increased and set at a level proportional to, though less than, the costs of courses. Equity in access to higher education could be ensured by a system of loans repayable on the basis of future incomes, if necessary augmented by a system of grants. If universities were more accountable and had more autonomy--as recommended by the Cour des Comptes--competition to attract students would be stimulated, and they would be encouraged to make more effective use of these increased resources.

Pension reform must continue so as to cope with the pressure that will be exerted on government spending by population ageing

The additional government spending that France will have to finance between now and 2050 because of increased pensions, health and dependency care related to population ageing is estimated by the authorities at more than four percentage points of GDP, and that is under relatively optimistic assumptions. After the progress made in the 2003 pension overhaul, it is now essential to increase employment among older workers and to continue these cost-cutting efforts in 2008 by preserving the rule that the contribution period should be indexed to life expectancy as foreseen in the 2003 law. This solution, and/or a cut in the replacement rate, is preferable to increasing contributions; taxes and social contributions are already too high, damaging output and employment. Fairness and, to a lesser extent, public-finance concerns dictate an immediate start to the process of gradually eliminating the privileges of the "special" regimes covering employees of current or former public enterprises, which have so far been spared reform.

The cost and effectiveness of health care and dependency policies for the elderly need to be monitored

The health care and dependency-related costs of population ageing are more uncertain than those of retirement pensions because they depend on technological progress, price trends for services and treatment, and the share of expenses paid by families. Moreover, it can be difficult to distinguish between health care and dependency spending, while local government assessments of individuals' degree of dependence seem to be subject to inconsistencies. For these reasons, it is important to provide public information on the current level and projected trends in spending, and on the content of existing policies, their funding and how responsibilities are shared. Such information would provide the basis for deciding, jointly and explicitly, the magnitude of the costs to be borne by families, and thus for encouraging people to set aside the necessary savings.

Consistent principles promoting clear accountability should guide the organisation of State and lower levels of government

The different levels of local government have progressively been given responsibility for implementing, and in some cases formulating, a significant part of policy on poverty, education and population ageing, as well as in other areas. This "decentralisation" can take two contrasting forms: transfer of full responsibility for a given function; or transfer of the implementation of a public policy for which the State sets the specifications. In practice, there is a continuum of situations in which responsibilities are shared between the State and sub-national governments. Ideally, each case should reflect an appropriate trade-off between the need to make local authorities accountable to their electorates for framing and implementing effective local policies, and a desire for services that are of identical quality nationwide, and thus specified by the State. Decentralisation in France is partly the result of one-off decisions, taken without full consideration of this trade-off, and this has led to a number of inefficiencies. To achieve the hoped-for gains in the cost-effectiveness of government spending, the division of responsibilities between the State and sub-national governments should be gradually stabilised and clarified with a view to enhancing accountability. Unlike central government outlays, spending by lower-level authorities is not subject to rules to assign objectives nor to produce performance indicators. To stimulate competition through information and facilitate policy evaluation, a system should be developed to give taxpayers readily accessible information on the expenditures of sub-national governments, how they are financed and the quality of services rendered, as recommended by a number of recent reports submitted to the government.

The State also intervenes in local taxation by granting tax exemptions to certain kinds of households or businesses, and then compensates with offsetting financial transfers. As a result, own tax revenue has shrunk in relation to sub-national governments' total resources, loosening the ties between citizens and their elected officials and making those governments less accountable. Functions lying essentially with sub-national governments should be financed by local taxes, and State-granted exemptions from local taxes should be gradually eliminated. Services over which sub-national governments have little decision-making power could be funded by transfers from the State, but with mechanisms that encourage those governments to pursue efficiency goals. The use of financial transfers from the State should be refocused on the objective of equalisation to offset inequalities between lower-level entities, which will be greater if responsibilities are financed to a greater extent by local taxes. Any other intervention by the State should be limited to situations where there are clear cross-jurisdictional externalities.

Responsibilities of the various levels of sub-national government should be defined more clearly and the system simplified

The system of sub-national governments is complex, comprising three main levels with no hierarchical relationships among them. Each level has wide powers within its borders, leading to a number of overlapping responsibilities. Added to this are multiple forms of cooperation between municipalities, most recently "intercommunality", intended to improve efficiency but often not achieving it. On the contrary, this complexity lies at the root of a number of inefficiencies which should be corrected if decentralisation is to yield its full benefits. From the pure efficiency perspective, reducing the very large number of municipalities (36 500) would be a useful step. In its absence, overlapping responsibilities should be limited by gearing the system towards greater specialisation by the various levels of sub-national government, thus limiting the "general powers" principle, and appointing "lead managers" to take responsibility in each domain. Lead managers already exist in a number of areas; they must be given the responsibilities and the powers needed to implement effective policies. The State intercommunality grant, intended to encourage co-operation but in practice also encouraging spending, should be time-bound, giving a stronger incentive to exploit available economies of scale. In the longer term, the State could consider implementing a single consolidated grant to be distributed by the "intercommunality" groupings and the communes according to the tasks for which they are actually responsible. But this could weaken citizens' control over decision-making, since those in charge of running these groupings are not directly elected at the moment, and decisions on allocating resources would be difficult.

To keep public finances sustainable, government employment must be rolled back

The State has not reduced the number of its civil servants in line with the reduction in its responsibilities. Lower levels of government have been recruiting massively The resulting sharp rise in government employment leads to increased pension costs for the future as well. The State must take advantage of the forthcoming retirement of large numbers of its civil servants to reduce overall government employment. So-called "deconcentrated" State services, which duplicate the efforts of corresponding agencies of sub-national governments, should be evaluated and abolished if they are not strictly necessary.
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Publication:OECD Economic Surveys - France
Geographic Code:4EUFR
Date:Jun 1, 2007
Previous Article:Executive summary.
Next Article:The key challenges facing the French economy.

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