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Progress in labour market and other reforms.

The authorities have undertaken numerous structural reforms since the lest OECD Economic Survey was published in June 2007. Many of those reforms go in the direction of the recommendations offered et that time, while other reforms conducive to social dialogue have also been put in place. This chapter reviews the progress that has been made in improving the functioning of the labour market, addressing the problem of demographic ageing and making the education system more effective. These efforts will have to be pursued and the momentum of reform maintained, pressing ahead even further in some fields while perhaps changing course in others. The greatest challenge is to raise the employment rate in order to restore the health of public finances and sustain rising living standards.

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In the wake of the presidential elections of May 2007 and the installation a month later of a new government, numerous reforms have been launched to improve the functioning of the French economy. In this connection, the report of the "Commission to Liberate French Growth", chaired by Jacques Attali and published in January 2008, represented a relevant diagnosis of the actions needed to raise the country's growth potential, reduce poverty and unemployment and cut the public debt as a percentage of GDP (Attali Commission, 2008). The OECD in fact made a significant contribution to that report (OECD, 2008a). By the end of 2008, according to the Commission's members, more than two-thirds of the 316 measures proposed had been implemented wholly or partially or were under discussion, demonstrating that the report served to initiate new government plans or is at least consistent with them. While some measures have respected the spirit of the report rather than its letter, it certainly contributed to the debate and to the overall momentum of economic reform in France.

The previous OECD Economic Surucy (OECD, 2007a) highlighted the fact that an increase in employment would have a favourable impact not only on poverty and social exclusion but also on public finances, through additional revenues from social contributions and income tax, and would at the same time reduce social expenditures (unemployment benefits, RMI, etc). It would also diminish the long-term risks to public finances posed by the ageing of the population (see Chapter 1), in a context where the efforts aiming at reforming the pension system must be continued not only in France, but also in many other OECD countries (OECD, 2007b). Finally, it would narrow the gap in living standards between France and the most advanced countries. While in the first half of the 1970s the overall employment rate in France was comparable to that in the United States and was associated with a similar per capita GDP, a persistent gap in living standards appeared thereafter, sparked by a severe drop in employment rates for youth and seniors in France (Figure 2.1). The employment rate stabilised during the 1990s and then improved between 1997 and 2003. But this progress has been largely halted since 2003. (1)

The last Survey stressed that the weakness of the employment rate has much to do with the characteristics of the labour market and the French system of social protection. Even if the system is successful in keeping the bulk of the population out of poverty, it is less effective in avoiding social exclusion and easing entry into the workforce. Simultaneously, older workers tend to stop working before they reach the age of 60, so that the employment rate for persons between 55 and 64 years is significantly lower than the Lisbon strategy's target of 50% for 2010. Given these issues, slower increases in the SMIC (the minimum monthly wage) and the introduction of a "single employment contract" were recommended, together with enhanced and better targeted in-work benefits. It was also recommended that the contribution period be lengthened further, that the financial incentives to keep working beyond the legal retirement age be strengthened, that older workers drawing unemployment benefits should no longer be exempt from active job-search requirements, and that the special retirement regimes be reformed. Finally, the previous Survey emphasised that employment prospects could be enhanced by offering greater performance incentives at all levels of the education system, notably through greater autonomy for secondary schools and universities.

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The authorities have undertaken numerous structural reforms since the last Survey was published. Many of those reforms go in the direction of the recommendations offered then, and the progress achieved in the areas mentioned above is presented hereafter. Measures have also been taken to foster competition on markets for goods and services, and these are discussed in Chapter 4. These efforts will have to be pursued and the momentum of reform maintained, pressing ahead even further in some fields while perhaps changing course in others.

For years, one of the characteristic features of France has been a low level of co-operation in social dialogue. And yet a number of recent studies show that quality labour relations are in many cases associated with lower unemployment rates (Blanchard and Phlippon, 2004; Feldmann, 2008). Improving the quality of social dialogue in France is thus an important vector for raising the employment rate, especially insofar as the effectiveness of labour law would probably be enhanced if the law were more contractual and less regulatory (Barthelemy and Cette, 2008). Two major laws have expanded the role of the social partners in the French economy's dynamic of structural change launched two years ago and have laid the foundations for numerous initiatives affecting the functioning of the labour market. The January 2007 law modernising "social dialogue" established a reform strategy based on consultations and negotiation between labour and management organisations on the basis of prior proposals by the State. In addition, the August 2008 law on the "renewal of social democracy and working-time reform" introduced new rules for the validity of agreements stemming from inter-professional negotiations. The latter legislation is likely to make trade unions more accountable by making their respective showings in occupational elections a decisive factor in representativeness and validation of collective-bargaining agreements.

A reform strategy based on negotiations between social partners runs the risk of producing "insider" agreements, as shown by the rejection of the proposed single labour contract. Nevertheless, the government and Parliament ultimately have the final say on any decisions, insofar as the legislation adopted can differ significantly from agreements between social partners if the government deems those agreements insufficient. Furthermore, it is possible that social partners may sign agreements that improve conditions for "outsiders", as illustrated by the example of the new unemployment insurance scheme calling, inter alia, for a reduction from six to four months of the minimum affiliation period needed to qualify for benefits.

Improving the functioning of the labour market to combat poverty and social exclusion

Overcoming the dualism of the labour market

To reduce poverty and the sense of insecurity, the last Survey recommended that employment protection legislation should be amended to attack the dualism that prevails in the French labour market. On the one hand, there are workers with an indefinite labour contract (CDI) who benefit from rules that make dismissal or layoff complicated and costly (which may explain why such contracts are hard to get), and on the other hand there are others, often working under a fixed-term contract (CDD) or as temporary staff--arrangements that allow firms to adjust to shocks but that leave workers exposed to uncertainty. Given this reality, the recommendation of the previous Survey was to introduce a single labour contract, one that would offer progressively greater protection as seniority in the firm increases, while leaving the employer the scope to decide on economic grounds whether it is time to let one or more employees go, the idea being that the courts should intervene only to prevent abuse (such as discrimination) in layoffs.

A government proposal that moved in the direction of a single contact was in the end rejected by the social partners in negotiating the Accord national interprofessionnel (ANI) of January 2008 on modernising the labour market. Neither the unions nor the employers' organisations were willing to support it: the unions saw it as an attack on the regulations governing redundancy, while the employers likely felt that other available types of contact (CDDs, temporary contracts) offered a simpler way to achieve staffing flexibility (Fabre et al., 2008). In particular, given uncertainty about the degree of detail with which the courts can interpret breach of contract, the employers might have feared that a sing]e contract could lead to even greater rigidities. The labour market modernisation act of June 2008, which reflects the main provisions of the ANI, created, on an experimental basis for a period of five years, a special CDD which is reserved for engineers and management staff and is to be used for carrying out specific projects. Moreover, the length of the CDI probation period has been extended. Finally, the law reclassified all the contrats nouvelle embauche ("new recruitment contracts", CNEs) as CDIs. While the CNE introduced some easing of labour contract regulations for firms with fewer than 20 employees, the Paris Court of Appeals had ruled that the probationary period (two years) was too long, and the International Labour Organisation had judged that it failed to comply with a convention that prohibited the termination of employment without valid reason.

If a reform instituting a single contract were precluded, the previous Survey recommended easing the legislation on CDIs in other ways, such as broadening the definition of economic redundancy, simplifying layoff procedures and reducing firms' redeployment obligations. Once the crisis has been overcome, progress on the issue of economic redundancy would be advisable. However, the labour market modernisation act simplified the law governing layoffs by introducing the option of terminating a CDI by mutual consent of employer and employee (rupture conventionnelle). In fact, this move gives legal recognition to, regulates and expands a practice widely followed in the past for the departure of managerial personnel: "amicable termination for personal reasons" (rupture amiable pour motif personnel). As a result, in contrast to past practice, this form of termination confers entitlement to unemployment insurance benefits and to the tax and social treatment associated with severance pay, while at the same time providing employers with greater legal security. This does, however, pose certain risks and negative externalities, stemming in particular from the risk of abuse of the unemployment insurance system. In the case of workers who reach the age of 57, the risk, which already existed under the old system, stems above all from the rules for compensating seniors, given their entitlement to 36 months of unemployment benefits and the fact that the legal retirement age is still set at 60. The resulting effect could partly offset efforts to postpone the effective age of retirement and to increase the employment rate for seniors. Finally, while any agreement acquires legal force upon approval by the Departmental Director of Labour, Employment and Vocational Training, a disputed case can be referred to the Conseil de prud'hommes (the employment relations tribunal)--a provision that undermines the legal certainty of this form of termination. (2)

Reducing the counterproductive effects of a minimum wage that is set too high

The previous Survey stressed that the minimum wage in France, the SMIC, is not the most appropriate instrument for combating poverty. Relative to the median wage, it is one of the highest in the OECD, and, because of steep hikes in the past, it has risen faster than the productivity of unskilled workers. Because of this, the cost of hiring unskilled workers increased until 2006, despite cuts in employers' social contributions. In this context, to increase employment of the unskilled and to make for less compression in the structure of wages above the SMIC, it was recommended that the SMIC should grow at a much slower pace in coming years and that, at the very least, discretionary upward "nudges" should be avoided.

Over the last two years, the authorities have in fact avoided such "nudges", and the percentage of workers affected by SMIC adjustments dropped from slightly over 16% in 2005 to around 13% in 2007. Successive July I adjustments (amounting to an average of 1.5% per year) have corresponded to the minimum amount consistent with existing legislation. (3) Pursuant to that legislation, there was also an automatic increase of slightly over 2% on 1 May 2008, reflecting the fact that the benchmark price index had exceeded the 2% threshold on a year-over-year basis. More generally, the Survey recommended a more considered approach to setting the SMIC, relying on expert opinion and consultation, as is done in some other countries (for example, with the United Kingdom's Low Pay Commission). The December 2008 law to promote income from work calls for a change in the procedure for setting the SMIC as of 2010. A group of independent experts is to make proposals to the government and the Commission nationale de la negociation collective (National Collective Bargaining Commission, CNNC) on the appropriate changes in the SMIC, which represents a framework for setting up the SMIC that goes in the right direction. Finally, the adjustment date of the SMIC was moved forward from 1 July to 1 January. Such a change will make for a better fit with the timing of industry--and company-wide wage negotiations.

Better targeting of in-work benefits

The 2007 Survey also argued that there is a better way to combat poverty than through constant SMIC increases and continuous cuts in employers' social contributions. Instead, it recommended using the earned income tax credit (prime pour l'emploi, PPE), while focusing it more directly on poor families. At the same time, it suggested reviewing the benefits system to ensure that having a job, even if only for a short time, generates additional income beyond what benefits alone bring. The generalised introduction of a new social benefit, the Revenu de solidarite active (RSA), as of June 2009 will address several of these issues. More generally, it is intended to lift 700 000 people above the poverty line. Following introduction of the law on work, employment and purchasing power (TEPA), testing of the RSA has been underway in 34 departments since 2007. In these experimental zones, it is estimated that RMI beneficiaries returned to work at a rate 30% higher than in the "control" zones.

Technically speaking, the RSA serves three objectives. First, it will make the social benefits system less complex and boost the incentive for the unskilled to seek work (Cahuc et al., 2008). The RSA will replace the benefits that top up income to a certain minimum level, i.e. the revenu minimum d'insertion (RMI, a benefit that provides a guaranteed income) and the single-parent allowance (API). It will also take the place of the PPE for beneficiaries who return to work at an income that falls within a certain range (see Figure 2.2). Finally, it will replace the one-time back-to-work bonus for persons working at least 78 hours a month and the temporary work incentive for persons taking part-time jobs. Consequently, it will help not only to do a better job of smoothing the effects of tax thresholds and effective marginal tax rates, but also to make permanent the incentive mechanism, which had been paid for one year only. Second, it will reduce the proportion of poor workers: 33% of poor people (defined as those with incomes at or below 60% of the median income) were working in 2004, representing 5% of the population (OECD, 2007). Third, it will boost incentives to work by guaranteeing that people who return to work will see an improvement in their incomes from the very first hour on the job. The way the RSA is constructed, beyond what the RMI provides (income for inactivity), it supplements income from activity: one euro earned from work guarantees EUR 0.62 of additional income.

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The RSA transfers resources to families with very low incomes. The additional cost of this provision beyond the benefits it replaces is EUR 1.5 billion per year. It is to be financed by a surcharge of 1.1 percentage points on the social charges levied on investment income (with the exception of certain regulated savings accounts), the level of which is raised from 11 to 12.1%. (4) It was initially planned to finance the RSA by redirecting the PPE to the poorest workers. That would have been in fact a desirable objective. Integrating the PPE into the RSA would correct some of the PPE's shortcomings: not only the fact that it is still hardly targeted at low-income people but also that its amount is relatively low, and there is a time lag between taking work and receiving the bonus, which is calculated on the basis of income from the previous year. Despite some improvements, this last element makes the PPE hard to understand, reducing its impact as an incentive to take up work, while the Social Security Offices will pay the RSA every month (with quarterly updating of the beneficiary's position). The difference, however, is that, in contrast to the PPE but as with the RMI, the RSA beneficiaries must be over 25 years of age. Overall, the desire not to create "losers" has kept a portion of the PPE in place, leading to a complicated blending with the RSA (see Figure 2.2). Thus, as of June 2009, it is expected that 300 000 families will receive the RSA and a PPE supplement, and 5.1 million families will be receiving the PPE only (Dolige, 2008). The number of families receiving the PPE will, however, decline by around 300 000 because of the decision not to raise the thresholds and the caps of the credit in 2009. This represents a budgetary saving of some EUR 400 million.

Devise more effective policies for helping the jobless and the excluded to find work

The OECD Jobs Strategy stresses that it is better to protect people rather than jobs and advocates the promotion of work opportunities. With a view to rationalising and making more efficient the various services for the unemployed--registration and interviewing, placement, delivery of allowances and ongoing support--the February 2008 law reforming the organisation of the public employment service (PES) provided for the merger of the organisation that delivers placement services for job seekers (ANPE, run by the State) and the unemployment insurance agency (UNEDIC, managed by the social partners). The creation of a one-stop shop, the "Pole emploi", is in line with the recommendations of the previous Survey. It came into effect on 1 January 2009 and is to be in general service by the end of the year, but, should the merger be completed, it will be important to avoid the maintenance of two distinct entities in terms of governance.

This merger offers the chance to refocus the PES on registering the unemployed and helping them find employment with the aid of specialised external placement agents. However, in practice, the latter's effectiveness is uncertain (Cahuc and Kramarz, 2004; Cahuc, 2008). Their compensation should perhaps be tied more closely to an observable performance indicator, such as the rate of reemployment for the job seekers they take under wing. The cost of these services could be reduced, moreover, by selecting agents through competitive tender. The outsourcing of placement services does not necessarily diminish the influence of the PES in favour of private operators: in fact it retains a key role, through its profiling of job seekers, in providing direction and guidance towards reemployment (Georges, 2006). In order to optimise its range of services, the PES should learn from the trials that have been conducted as to the effectiveness of enhanced accompanying measures (Behaghel et al., 2008). In general terms, it would be preferable to have the PES helping those made redundant to find new work, rather than requiring firms to implement social plans to assist those laid off, and to finance the corresponding costs with an experience-rating type mechanism (linking the level of an employer's contributions to unemployment insurance to the number of its redundancies).

The previous Survey stressed the need of harmonising the rights and obligations of the potentially active unemployed, and restoring the obligation to look for work. Reforms going in this direction have been started by the authorities. The August 2008 law on the rights and duties of job seekers proposes better support and encouragement for the unemployed. The PES will assist them in working out individualised employment plans in light of their personal characteristics (qualifications, working experience, personal situation, etc.) and those of the desired job (expected wage or salary, preferred geographic location, etc.). Those plans will serve to define a "reasonable offer of employment'. The law stipulates that a job seeker may not turn down more than two such offers without having his or her benefits suspended for two months. Moreover, the new rules force job seekers to moderate their expectations as to pay and geographic location as time goes by without finding work. Finally, a new social agreement on unemployment insurance to broaden the conditions of access to unemployment benefits in return for a cut in employers' contributions if the unemployment insurance system is in surplus is in effect. The agreement features two major strides: first, it lowers to four months (instead of six) the qualifying period for entitlement to benefits, which is one way to reduce the dualism of the labour market and shows that labour/management negotiations can yield pacts that are not "insider agreements"; and second, the implementation of a single, uniform process, improves the transparency and fairness of the benefit system by eliminating a number of undesirable threshold effects.

One outcome of the April 2008 employment insertion summit was the contrat unique d'insertion, a new standard work contract for persons furthest removed from the labour market. This contract simplifies the various types of assisted work contracts for groups facing the greatest difficulty in finding a job, while allowing greater flexibility in respect of renewal or changes in the length of the work week. Employers' actions in promoting employment will be assessed to avoid windfall effects or possible impasses. The new contract is supplemented by other provisions, such as priority attention given by the PES to workers under these contracts (individualised coaching, training, etc.). Finally, consistent with the recommendations of the previous Survey to limit "inactivity traps" by not tying related entitlements to the recipient's status, some benefits are to be subject only to a means test (e.g. exemption from the local property tax and universal basic medical coverage). However, care should also be taken to try to keep marginal effective tax rates as moderate as possible over the range of income where benefits are phased out.

Measures have also been taken to raise the youth employment rate, with a special focus on young people in the most disadvantaged locations. Employment promotion programmes for 16 to 25 year-olds include personalised interviews at local employment offices and support through the "social integration contract". The Espoir banlieues ("Hope for the suburbs") programme, announced in February 2008, contains several measures to boost employment for young people in sensitive urban areas, who often surfer from unemployment, poverty and discrimination. First, a new type of contract is being tested: a young person enters into a "contrat d'autonomie" ("contract for independence') with a placement agency, which is paid according to results. The beneficiary receives individualised training and coaching for a total of one year (six months before and after signing a work contract). Second, it provides support for creating an enterprise, offering a package that combines and adapts financial assistance from all available programmes. Third, it encourages large companies to sign a "national commitment to employ youth from the quartiers" (low-income neighbourhoods) under which they offer recruitments and/or training. A year into this plan, however, there are still delays in getting it up and running. Finally, the TEPA law on work, employment and purchasing power raised the tax exemption ceiling on earned income for students from two to three months worth of SMIC over the year. This tax benefit has been extended to all those under the age of 25.

Encouraging increased working time

Against a backdrop of decomposing growth, the downward trend in hours worked per employee has continued to have an adverse impact (Table 2.1). The annual number of hours worked per employee is in fact among the lowest in the OECD (Figure 2.3), although there has long been a downward trend in most developed countries (OECD, 2008b). Nevertheless, steps have been taken to encourage longer working hours. While the legal workweek remains at 35 hours, the TEPA law of August 2007 raised overtime pay for work beyond that threshold. Additional hours worked are now exempt from employee contributions and income tax, and the legally mandated overtime premium has been raised from 10 to 25% in firms with fewer than 20 employees. Employers also benefit from a lump-sum reduction in their contributions.

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The implementation of the TEPA law has been accompanied by a significant increase in reported overtime hours, though the number of hours actually generated by the law is statistically difficult to evaluate, mainly because of low declaration rates by businesses in comparison with the pre-August 2007 situation (DARES, 2008). As well, overtime has been subjected to a complex set of rules designed to prevent fraud (such as declaring one-rime bonuses as overtime pay for tax-exemption purposes or cutting the hourly wage and simultaneously lengthening reporter work time). This has generated additional administrative costs for firms and additional supervisory costs for government without completely eliminating the risk of opportunistic behaviour, it would appear. Moreover, the possibility that overtime has substituted for new recruitment cannot be discarded, at least in the short term, even if beneficiaries' purchasing power may have boosted activity and employment and the lower cost of labour has perhaps sustained the demand for labour. In any case, financing the cost of these tax relief measures, which amounted to EUR 3.5 billion in 2008, will mean greater tax pressure over time, and this will tend to depress acrivity (Artus et al., 2007; Blanchard et al., 2007). Lastly, the August 2008 law on the "renewal of social democracy and working-time reform" introduced additional instruments for managing working times within firms without calling the statutory and maximum working times into question (Box 2.1).

Promoting appropriate housing policies

To combat poverty and exclusion, it was recommended that efforts to support poor families and to make the supply of private housing more elastic should be expanded, in particular by reviewing regulations governing the security of rental tenure. The February 2008 law on purchasing power changed the rules governing residential building leases. The new provisions are intended to favour tenants, but they could have the effect of depressing the supply of housing. In order to contain rent hikes, therefore, the benchmark index has been changed, (5) The law also reduces the lease security deposit by half and limits it to one month's rent excluding maintenance charges. However, the February 2009 Law on Mobilisation for Housing and Combatting Exclusion includes a number of measures likely to bolster the supply of housing. Among them is a temporary easing of zoning rules authorising builders, within stipulated limits, to exceed construction standards (height, floor area ratios, etc.) and a refocusing of support for investment in rental housing to areas where supply is tight. In addition, the amount of time a jurisdiction may grant to suspend execution of an expulsion decision was cut from three years to one.
Box 2.1. Recent changes to ease working-time management

The "chosen hours" (heures choisies) scheme repealed by the new law
had already enabled a worker, at the employer's initiative, to work
beyond the firm's standard overtime quota, but without exceeding
the statutory maximum working hours. Now a business is free to set
the level of overtime that its employees can work with no need for
prior industry-level authorisation. Since exceeding the quota is no
longer subject to control by labour inspectors, the quota is no
longer a ceiling for the volume of hours worked, but merely a
threshold above which mandatory compensatory leave (the length of
which is still governed by law, but the terms and conditions of
which may be set forth in a company-wide agreement) is triggered.

This freedom for individual firms also applies to the maximum
number of days worked by employees subject to "annual working days"
(forfait en jours sur l'annee) agreements: mutual agreements
between employers and employees to exceed the statutory 218 days no
longer require prior group approval. The law stipulates an annual
limit of 235 days, but this can be extended to up to 282 days
through a company- or industry-wide agreement. Pay for these
additional days' work is at least 10% higher. Until year-end 2009,
pursuant to the "purchasing power law" of 8 February 2008, these
extra days also qualify for exemptions under the TEPA law
(exemption from income tax and employee-paid social security
contributions and fiat-rate exemptions for employer contributions).

Lastly, the terms for converting earned extra leave (RTT) (1) into
pay, either immediate or deferred, when employees deposit leave
entitlements to a leave-time savings account (compte epargne-temps,
CET), (2) as well as the frequency for assessing working cycles at
the collective level, may also be negotiated freely by businesses.

(1.) RTT days are additional leave days awarded to an employee in
compensation for work time in excess of the 35-hour week.

(2.) Pursuant to the "purchasing power law" of 8 February 2008,
these days also qualify until year-end 2009 for exemptions under
the TEPA law (exemption from income tax and employee-paid social
security contributions and fiat-rate exemptions for employer
contributions).


The government has also tried to promote home ownership. The TEPA law revised and lowered succession and donation duties and instituted a mortgage interest tax credit (during the first five years) for the purchase or construction of a principal residence. While a tax break on mortgage interest for real estate purchases does not in itself lead to sharp inequalities of wealth, it can exacerbate them if the motivation is to bequeath the property (Cho and Francis, 2008). In fact, cutting taxes on the transfer of property would have been a better way to promote ownership and would do more for labour mobility as well. The reduction in such duties could, however, be expected to be very costly for the local governments that collect them. Acquiring ownership has also been made easier in the HLM (geared-to-income rental housing) market. The proceeds from sales should go to financing new construction. Those proceeds could be supplemented by the funds that will flow from the extension of the "liuret A", a high]y popular regulated savings product that has been offered by all banks since January 2009. New constructions appear to be necessary: the practical impact of adoption of the legal right to housing for the poorest families has been uneven, mainly because of a shortage of social housing in certain cities (Bellan and Chauveau, 2008). The mobilisation for housing law delivers a response to this strong demand, inter alia by imposing a levy on the financial resources of social landlords who fail to meet their construction targets. Such a levy effectively pools resources between social housing bodies owning rental properties so that resources untapped by some might help assist landlords faced with substantial investment requirements in especially tight sectors. Finally, a socially assisted ownership plan has been introduced for couples who are purchasing a home for the first time: the plan is to produce 30 000 dwellings in 2009, for which buyers would pay EUR 15 per day for up to 40 years.

One move called for in the economic recovery plan adopted at the beginning of 2009 (see Chapter 1) is to begin construction on 70 000 social housing units, of which 30 000 would be reserved for renting to households with the lowest incomes and 40 000 would be rented to middle-class families, with an option to buy. This programme comes in addition to the purchase by subsidised housing bodies (HLM) of 30 000 dwellings from developers who have been unable to begin construction because of the market downturn. The application of this programme was made possible by an easing of the conditions for such purchases by HLM. The "design" phase of the projects having already been completed, the purchase option should ensure that some of these construction projects can be resumed soon. The recovery plan also seeks to support construction of new private dwellings for first-time home-buyers (in the modest and medium income ranges) via zero-cost financing. This involves a State-subsidised interest-free loan, the amount of which has been doubled (up to 30% of the cost of the dwelling), and higher ceilings on the price of eligible units.

In all, social housing is an important component of efforts to address the problem of poverty and social exclusion. Measures and incentives that favour tenants and promote homeownership may also serve important economic policy objectives. However, they may have counterproductive effects on property prices and rents, especially if the price elasticity of supply is low, making it less likely that the desired objectives can be achieved cost effectively.

Raising employment rates for seniors in a context of demographic ageing

Consistent with the 2003 law making provision for an indexation of the public pension contribution period to life expectancy, the lengthening of the contribution period to 40 years was officially confirmed in 2008, in accordance with the recommendation made in the previous Survey. That period will now be increased gradually by three months per year, starting in 2009, until it reaches 41 years in 2012. However, there has been no change in the legal retirement age. It remains fixed at 60 years and is still below the legal age in many Western countries of the European Union (65 years) or in the Scandinavian countries (67 or 68 years). Hairault et al. (2006) have shown that distance to retirement is one factor that explains the employment rate of seniors in France. (6) The lower legal retirement age conferring entitlement to a full pension (with no penalty) can indeed reduce the employment rate of older persons for several reasons. For one thing, it may reduce the incentive for firms to invest in training them once they reach the age of 50 or 55, insofar as they will be seen as approaching the end of their career. Second, the legal age not only influences individual behaviour but also sets a benchmark in negotiating early retirement. Finally, there is no empirical evidence to suggest that the reasons for low employer demand for older workers is that their productivity slips relative to their pay. Nevertheless, a low legal retirement age may lead employers to think, wrongly, that there is such slippage, particularly when productivity is not readily measurable. For all these reasons, it is to be hoped that the new round of negotiations, planned for 2010, on improving the employment rate of seniors and making the retirement system sustainable will lead to an increase in the legal retirement age.

To boost the incentives for a longer working life, the last Survey recommended making pensions actuarially neutral, particularly in the retirement age bracket. Beyond age 60, the quarterly pension premium (surcote) has been raised to 1.25%, or 5% per year, the same as the target rate for the early retirement penalty (decote). The government has also relaxed the rules on combining employment and pension income for persons 60 and over (if they have contributed long enough to qualify for a full pension under the general regime), and for those over 65 in all cases. The two previous constraints have thus been lifted: the ceiling on combined work/pension income, and the six-month waiting period before returning to the last employer. Finally, the mandatory retirement age for most private-sector employees has been raised from 65 to 70 years, and this provision will apply fully as of 2010. Other categories of employees (police officers, fire fighters, airline pilots, hostesses and stewards) have been allowed to continue working until they are 65 instead of 55 or 60 as was the case previously. Generally speaking, a more ambitious reform might have left it completely up to the employee to decide how much longer he or she would work beyond the legal retirement age, but selection biases would make it difficult to apply.

To improve the low employment rate for seniors, several other measures were recommended. One of these was to eliminate incentives to early retirement by ending the active job-search dispensation (DRE) for unemployed beneficiaries over the age of 57 and by abolishing the tax exemptions for indemnities from either imposed or voluntary early retirement. The August 2008 law on the rights and duties of job seekers provides for the gradual elimination of the DRE beginning in 2009, progressively raising the age for this dispensation and eliminating it completely as of January 2012. The initial draft law on the financing of Social Security in 2009 called for harmonising the tax treatment of layoff and retirement benefits, but, with the economy and the labour market reeling, this reform was not introduced. On the other hand, in the case of early retirement the employer contribution rate has been raised from 24.15% to 50% for all indemnities and benefits paid from 2009 on. At the same time, the employer contribution rate on indemnities in the case of forced retirement at the employer's initiative has also been increased from 25 to 50%. Finally, the very generous separation allowances (commonly known as "golden parachutes") are now subject to social charges from the first euro if they exceed a threshold of 30 times the annual Social Security ceiling (i.e. about EUR 1 million). The discrepancies in the tax treatment of layoff and retirement benefits tend to produce distortions: that treatment should instead respect the principle of taxation from the first euro, with no special exemptions.

Lifelong learning is one of the possible levers for improving the employment situation for seniors. In January 2009 the social partners reached a new agreement on vocational training, professional development and career security. Among its provisions are:

* Establishment of a career security fund, to which labour and management would contribute equally, to support training for job seekers and less skilled workers.

* Possibility for the unemployed to retain individual training rights acquired in a previous job.

* Individual education leave, allowing workers to take training for up to one year, leading to a qualification or a diploma.

* Introduction of training to develop a "socle de competences", a basic set of knowledge and skills (teamwork, mastery of computer tools, competence in English, etc.) to facilitate adaptation and transition between jobs throughout a person's working life.

To encourage the employment of older persons, sectors and uncovered firms with more than 50 employees were asked to work out agreements or action plans based on a set of minimum specifications by the end of 2009. Those specifications were expected to be set by regulation and to reflect the outcome of management-labour negotiations in 2008 dealing with forward planning for employment and skills requirements, occupational training, and unemployment insurance. Firms that did not have an agreement or action plan in place by 1 January 2010 would be liable to a penalty of 1% of their payroll, payable to the old-age insurance fund. However, in the context of a fast rise in unemployment due to the crisis, the government chose to give up, at least temporarily, the idea to penalize financially the companies which would not produce an action plan. Finally, ANPE services for unemployed persons over 50 have been strengthened thanks to an action plan for the employment of seniors announced in mid-2008.

The last Survey, citing grounds of fairness and to a lesser extent budgetary considerations, urged the gradual elimination of the special retirement privileges granted to the employees of current or former public enterprises. The reform of the "special regimes" that came into effect in July 2008 harmonised them with the civil service regime. It calls for progressive increases in the contribution period to 40 years by 2012, and to 41 years (as in the general regime) by 2016; the introduction of a surcote (premium) and a decore (penalty) as in the ordinary regimes, and inflation indexing of pensions starting in 2009. As we]l, persons hired as of 2009 will no longer enjoy generous treatment of past contributions. In return, however, persons a]ready employed are to receive several advantages (raising within-grade salary ceilings, inclusion of bonuses in pension calculation, etc.), and this at first cast some doubt on the financial impact of the reform. A report from the Senate showed nevertheless that the overall effect would in fact help to reduce the deficit in the special regimes, although the savings in the initial years would be modest (Marini, 2007). Those savings would amount to EUR 500 million cumulatively by 2012 and EUR 1.34 billion by 2020.

Strengthening incentives for better performance in the education system

The previous Survey addressed the question of eliminating the carte scolaire, the catchment-area rule that assigns pupils to a school on the basis of geographic location. It recommended that the carte scolaire should be retained unless public school funding could be adjusted to reflect school choices by families. Experimental easing of the carte scolaire for secondary schools has been underway since 2007. The underlying principle is that families are free to choose their children's schools, subject to space availability, but also on the basis of priority criteria, including social criteria (students on scholarship, the merit principle, handicapped students, distance, etc.).

A reform of primary education has begun, with the main objective of reducing failure and grade repetition. Each pupil will be given a basic set of knowledge and skills and, by rearranging the school week, time will be reserved for personalised attention to students with problems. An initial stage of the upper-secondary education reform plan for the 2009 fall term was intended to cut the repetition rate and to prepare the students for exercising greater autonomy in their pursuit of further studies. (7) This reform has been postponed to the 2010 fall term in light of the tense social climate.

Several significant reforms have been made to the organisation of higher education and academic research (see also Chapter 3). Notable among them are an increase in the universities' operating budget, increases in the number and value of scholarships granted on social criteria, renovation and expansion of university facilities, generalisation of language learning to first-year non-specialist students and career guidance and placement mechanisms. The "reussite en licence" plan should help many students avoid failure. The goal is to ensure that, by 2012, 50% of each age cohort will earn a university degree, notably through the offer of supplementary hours of instruction or individualised monitoring for each student. The "Universities freedom and responsibility act" of August 2007 was a very important step towards autonomy in French universities, and the first 20 institutions have adopted new rules as of 1 January 2009. However, contrary to the OECD's recommendations from the previous Survey, this reform has not been accompanied by any explicit selection of students at entry (as is already in place at university technology institutes--IUTs) or any significant increase in tuition fees. Yet, a stride forward has been taken in an area related to the previous recommendation, i.e. to institute a system of student loans contingent on future income. In September 2008 a new student loan system was introduced, with market interest rates and repayment deferred. The number of loans will depend on how much the government contributes each year to a guarantee fund (70% of the principal is guaranteed by the State), and this, together with the fact that the maximum loan size of EUR 15 000 is low, may limit the impact and scope of this provision (60 000 loans are planned for 2009).

Protecting the environment and promoting sustainable development

Over the last two years, the government has sought to promote sustainable development and to combat climate change, in particular through the Grenelle Environment Round Table--a series of policy meetings held at the end of 2007 to draw up a long-term programme for the environment and for sustainable development. Parliament is now debating implementing laws emerging from those negotiations: they affect all sectors and are intended to change behaviour (a stiffer urban planning code, energy efficiency projects, audits of direct C[O.sub.2] emissions of municipalities and large enterprises, consumer information on the carbon equivalent of products and their packaging, etc.). In line with the Grenelle Environment Round Table and the "energy and climate" package adopted by the European Parliament in December 2008, France has selected two major areas for reform: increasing the energy efficiency of buildings, and reducing fuel consumption and transport. On the first point, as of January 2009 French households can take out an interest-free "green loan" to pay for insulating their homes and, more generally, for energy-saving improvements. Until January 2011, this measure can be combined with a tax credit earmarked for sustainable development and energy savings. The 2009 budget also provides for an additional benefit, beyond home ownership assistance and the interest-free loan, if the buildings concerned exceed the energy performance required under current regulations. On the second point, besides the premium for taking old vehicles to the wreckers that was part of the stimulus package for low-polluting vehicles (see Chapter 1), a system of "eco-stickers" was introduced in January 2008: it involves taxing purchases of new polluting vehicles to finance a tax credit for drivers who choose "clean" cars, and is designed to reduce carbon dioxide emissions from private vehicles to 130 g/km in 2020.

The Economic Survey of June 2007 also recommended changing some features of the petroleum products tax (TIPP). It is not now being used as a "green tax" but rather as a major source of revenue. There has been no meaningful progress in this field, and action is still needed to address the following problems: the tax per litre is less for diesel than for gasoline, although diesel is more polluting; there are exemptions on fuels used in selected industries and activities (agriculture, the building industry, commercial road transport); the tax on fuel oil is much lower for industrial use or power generation than for home heating, and bio-fuels and the polluting fuels used to produce it are not covered by the tax.

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Barthelemy, J. and G. Cette (2008), "Reforme du droit social et efficacite economique", Revue Francaise d'Economie, Vol. 23, No. 2, October.

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Blanchard, O., P. Cahuc and A. Zylberberg (2007), "Detaxation couteuse et aleatoire", Le Monde, 4 June.

Blanchard, O. and T. Philippon (2004), "The Quality of Labor Relations and Unemployment", NBER Working Papers, No. 10590.

Blanchet, D. (2006), "Age ou distance a la retraite : quel est le principal determinant de l'emploi des seniors", Economie et Statistique, No. 397.

Bellan, M. and J. Chauveau (2008), "Le droit au logement opposable est applique de maniere inegale", Les Echos, 24 December.

Cahuc, P. (2008), "En France, le taux d'emploi est particulierement faible pour les seniors et pour les jeunes", Le Monde, electronic edition, 6 May.

Cahuc, P., G. Cette and A. Zylberberg (2008), Comment concilier justice sociale et efficacite economique ?, Conseil d'analyse economique.

Cahuc, P. and F. Kramarz (2004), De la precarite a la mobilite : uers une Securite sociale professionnelle, La Documentation francaise.

Causa, O. (2008), "Explaining Differences in Hours Worked among OECD Countries: an empirical analysis', OECD Economics Department Working Papers, No. 596, OECD, Paris.

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Feldmann, H. (2008), "The quality of industrial relations and unemployment around the world', Economics Letters, Vol. 99, No. 1, April.

Georges, N. (2006), "Le profilage : outil statistique et/ou mode de coordination ?", Document de travail, No. 72, Centre d'etude de l'emploi, November.

Hairault, J., F. Langot and T. Sopraseuth (2006), "Les effets a rebours de l'age de la retraite sur le taux d'emploi des seniors", Economie et Statistique, No. 397.

Marini, P. (2007), Regimes sociaux et de retraite, Rapport general, No. 91, Senat, November.

OECD (2007a), Economic Surveys: France, OECD publishing, Paris.

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Notes

(1.) The various determinants of the employment rate in general, and of youth and older workers in particular, are discussed hereafter. However, that of women more specifically is also affected by the role of joint taxation of income and the existence, as in the French case, of a high marginal fax rate on the second wage earner (Causa, 2008).

(2.) The Conseil des prud'hommes settles individual disputes that arise between employees and employers in the course of fulfilling or terminating a labour contract. The tribunal is composed of lay judges (conseillers prud'homaux) elected in equal numbers by employers and employees.

(3.) SMIC adjustments are based on the evolution of the consumer price index (excluding tobacco), and half the growth in purchasing power of the basic hourly wage for labourers.

(4.) This new tax can be included in calculating the bouclier fiscal ("tax shield"), which caps total direct taxes at 50% of the taxpayer's income.

(5.) Indexation will now be based on the CPI excluding tobacco and rent, replacing the old benchmark index which combined the CPI (60% weighting), the construction cost index (20%) and the maintenance and improvements cost index (20%). As an illustration, at the end of the first quarter of 2008, rents advanced by 1.8% year-on-year compared with 2.5% with the old index.

(6.) Blanchet (2006) casts doubt on these findings, however.

(7.) Among the provisions of the reform are the experimental introduction, in 200 lycees, of measures to bolster individualised support for priority education students.
Table 2.1. The components of real GDP growth

                                   Average 88-97   Average 98-07

GDP growth                              2.0             2.3
  Labour productivity (per hour)        2.3             1.8
    Capital intensity                   0.9             0.8
    Multifactor productivity            1.4             1.0
  Total hours worked                   -0.2             0.5
    Hours worked per employee          -0.4            -0.5
    Working-age population              0.3             0.6
    Labour force participation          0.0             0.2
      rate (1)
    Employment rate (2)                -0.2             0.3

(1.) Ratio of labour force to working-age population.

(2.) Ratio of employment to labour force.

Source: DECD, Economic Outlook No. 84 database.

Table 2.2. Progress in structural reform: labour market
and anti-poverty policies

  Recommendations from previous     Actions taken since the June 2007
             Surveys                             Survey

     REFORM OF THE LABOUR MARKET AND POLICIES TO COMBAT POVERTY
                           AND EXCLUSION

Review employment protection        The government proposal to
legislation to reduce the           introduce a single employment
disparity between fixed-(CDD) and   contract was rejected by the
indefinite-term (CDI) contracts,    social partners, and has not been
preferably moving to a single       made law.
employment contract with lower
protection, increasing with
length of service.

If a single employment contract     Layoff law has been simplified by
is precluded, find other ways to    introducing the possibility of
ease the legislation on CDIS,       mutually agreed termination
such as widening the definition     (rupture conventionnelle) of the
of economic redundancy,             CDI, but this poses a risk of
simplifying layoff procedures and   abuse of the unemployment
reducing firms' redeployment        insurance system, especially in
obligations.                        the case of older workers.

Ensure that the SMIC grows more     Discretionary hikes beyond the
slowly than the median wage, by     legally mandated increase have
at least avoiding discretionary     been avoided. An advisory group
increases.                          of independent experts is to
                                    determine the appropriate changes
                                    in the SMIC as of 2010.

To reduce the risk of               As of June 2009, there will be a
unemployment and poverty traps,     new social benefit-the Revenu de
use the earned income tax credit    solidarite active (RSA)--which is
(PPE) and focus it more closely     designed to smooth out effective
on poor families, and review the    marginal tax rates, reduce the
benefits system to ensure that      proportion of poor workers and
having a job, even if only for a    increase incentives to work. It
short time, generates more income   would have been better, however,
than benefits alone.                to finance the RSA by refocusing
                                    more significantly the PPE on
                                    low-income workers, rather than
                                    by raising taxes on investment
                                    income.

     REFORM OF THE LABOUR MARKET AND POLICIES TO COMBAT POVERTY
                              AND EXCLUSION

Limit inactivity traps by           The local housing tax exemption
de-linking related entitlements     and access to universal basic
from the recipient's status.        medical coverage are now awarded
                                    according to a means test, which
                                    is preferable to using status.

Make the public employment          A one-stop shop (Pale emploi) has
service (PSE) more efficient by     been created through the merger
setting up a one-stop shop          of ANPE and UNEDIC. What
through a merger of ANPE and        constitutes a "reasonable job
UNEDIC, by harmonising the rights   offer" has been defined; a person
and obligations of those without    on unemployment insurance may not
work, by imposing a job-search      turn down more than two such
requirement, and by assessing the   offers without incurring
effectiveness of programmes         financial penalties. Over time,
specifically targeted at the        the jobless are expected to trim
unemployed. Target specific         their pay expectations and expand
measures on those furthest          the scope of their job search.
removed from the labour market      The "contrat unique d'insertiori'
and use profiling techniques to     simplifies the various types of
make targeting more effective.      assisted work contracts for the
                                    most vulnerable population groups
                                    and is complemented by priority
                                    attention from the PES.

Give priority to making young       Labour market entry programmes
people employable.                  for 16 to 25-year-olds are
                                    continuing; the "Espoir
                                    Banlieues' plan has been launched
                                    for youth in sensitive urban
                                    zones to help them join the
                                    workforce; tax advantages have
                                    been increased on employment
                                    income for students under 25
                                    years of age.

Make working-time regulations       The legal workweek remains at 35
more flexible.                      hours, but, with the TEPA law of
                                    August 2007, exemptions from
                                    social contributions and income
                                    tax have been granted for
                                    overtime hours; this is costly to
                                    the treasury and runs the risk of
                                    fraud. Additional instruments for
                                    easing the 35-hour rule were
                                    incorporated into the law on
                                    "renewal of social democracy and
                                    working time reform" of August
                                    2008.

Expand efforts to support poor      The rent indexation rules have
families and make the supply of     been revised to rein in
private housing more elastic, in    increases, and the security
particular by reviewing             deposit has been cut in half,
regulations governing the           which could well have an adverse
security of rental tenure.          impact on supply, although the
                                    temporary easing of zoning laws
                                    moves in the opposite direction.
                                    Introduction of a legal "right to
                                    housing" has faced the supply
                                    constraint, but the effort to
                                    expand the stock of social
                                    housing will be pursued, thanks
                                    to the extension of the Livret A,
                                    the home ownership plan (housing
                                    at EUR 15 a day) and the economic
                                    recovery plan.

Table 2.3. Progress in structural reform: Seniors employment policy

  Recommendations from previous        Measures adopted since the
             Surveys                        June 2007 Survey

                OLDER WORKERS EMPLOYMENT POLICY

Continue to index the               Extension of the contribution
contribution period to life         period from 40 to 41 years by
expectancy. Consider extending      2012 has been confirmed.
further the relative length of
the contribution period.            The quarterly surcote rate was
                                    raised to 1.25% past age 60, the
Make pensions actuarially           rules on combining employment and
neutral, especially in the          pension income were relaxed, and
retirement age bracket.             the mandatory retirement age was
                                    raised from 65 to 70 years.

Abolish tax exemptions for          As of 2009, the employer
indemnities related to either       contribution rate was raised to
compulsory or voluntary early       50% for all benefits paid to
retirement and harmonise the        early retirees.
overall taxation of redundancy
and retirement allowances.

End the active job search           Beginning in 2009, the
dispensation for the older          eligibility age for the active
unemployed.                         job search dispensation will be
                                    raised progressively until 2012,
                                    when the dispensation will be
                                    eliminated.

Extend the principles of the 1993   The reform of the special regimes
and 2003 reforms to all the         announced in July 2008 will
special pension regimes, and        harmonise them with the civil
align the civil servant schemes     service regime and will gradually
fully with the general system.      bring them into line with the
                                    general regime; however, various
                                    advantages have been granted in
                                    return to those hired before the
                                    reform, which accentuates the
                                    dualism between workers of
                                    different status.

Table 2.4. Progress in structural reform: Education policy

  Recommendations from previous        Measures adopted since the
             Surveys                        June 2007 Survey

                          EDUCATION POLICY

Introduce measures of secondary     With regard to information
school performance based on         mechanisms for families:
genuine "value added", for both     enhancement of the method for
lower and upper secondary           calculating value-added
schools.                            indicators for upper secondary
                                    schools via incorporation into
                                    value added of student outcomes
                                    on lower secondary school exit
                                    exams; availability, as from
                                    2009, of aggregated results of
                                    CE1 and CM2 student evaluations.

Unless public school funding can    Since 2007 the authorities have
be adjusted to reflect parental     been undertaking an experimental
choices, the carte scolaire         easing of the scope of
should be retained.                 application of the carte
                                    scolaire.

Higher education institutions       The "Universities freedom and
should be given autonomy in both    responsibility act" of August
financial and personnel             2007 laid the groundwork for
management.                         autonomy in French universities;
                                    it was implemented for the first
                                    20 institutions in 2009 and will
                                    be for other institutions within
                                    five years (see also Chapter 3).

Candidates for university entry     The move to university autonomy
should be explicitly selected,      has not been accompanied by the
and students should be offered      freedom to select candidates for
more effective guidance at the      admission. On the other hand,
beginning of the last year of the   guidance for bacfiolders is to be
lycee.                              enhanced through the publication
                                    of statistics on success rates in
                                    examinations, in obtaining a
                                    degree, in further studies and in
                                    finding a job. To this end, an
                                    "active guidance" scheme was
                                    generalised in 2009. Universities
                                    now send prospective students a
                                    non-binding advisory about their
                                    wishes, steering them towards the
                                    programme in which they would
                                    have the greatest chance of
                                    success.

Raise university tuition fees to    The move to university autonomy
reflect the cost of the various     has not been accompanied by the
courses.                            freedom to set tuition fees.
                                    These are regulated by the State.

Introduce a nationwide system of    A new student loan has been
student loans with provisions for   launched, offered at market
income-contingent repayment         interest rates with deferred
through the income tax system.      repayment.

Harmonise the diploma-granting      An initial step to harmonise the
and recruitment rules of the        grandes ecoles and universities
grandes ecoles and the              has been taken with the Boulogne
universities.                       process (LMD) and the
                                    establishment of the Poles de
                                    recherche et d'enseignement
                                    superieur (PRES, "research and
                                    higher education clusters") (see
                                    also Chapter 3).

Table 2.5. Progress in structural reform: Environmental policy

  Recommendations from previous        Measures adopted since the
             Surveys                        June 2007 Surveys

                         ENVIRONMENTAL POLICY

Make greater use of "green taxes"   Several tax incentives have been
(geared to the estimated costs of   adopted to promote "clean
externalities) and other economic   vehicles" with low C[O.sub.2]
instruments.                        emissions and to encourage
                                    households to invest in home
                                    insulation and energy savings
                                    (Grenelle Environment Round
                                    Table). No meaningful progress
                                    achieved in turning the Petroleum
                                    Products Tax (TIPP) into a real
                                    "green tax". Agriculture
                                    continues to enjoy various
                                    exemptions from the polluter pays
                                    principle, in particular when it
                                    comes to fuel taxes and water
                                    charges, exemptions that have no
                                    environmental justification.

Take action internationally to      The French government is pressing
tax emissions from air and sea      for such a move within the
transport.                          European Union.
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Publication:OECD Economic Surveys - France
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Geographic Code:4EUFR
Date:Apr 1, 2009
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