Thursday, June 28, 2007


OECD correctly recommended France to accelerate the reform of tight and rigid labor market structure to ensure competitive growth conditions and long-term sustainability of public finance as ageing population and PAYG pension system trigger the volatility and increase in public spending, particularly for healthcare and pensions. Consequently, net unfunded financial liabilities would grow into the spiral of unsustainability of public finance, putting public debt at risk and making structural crisis unavoidable.

Recent policy action concerning French labor market was replacing the plethora of job contracts with a unified contract where the protection of workers increase as the timeline goes ahead. The action, however, seems to generate generous conditions for existing labor force and increase entry barriers to future job seekers, further breaking-down the flexibility of labor market itself.

When in the course of labor market status, protectionism enters the structure, the power to negotiate about minimum wages gains while "faster-than-productivity" centralized wage growth creates a strong cost-push pressures, heating-up inflation pressure. Recently, extensive labor cost pressures forced Swedish central bank, Riksbank, to lift the interest (repo) rate above the expected level. It announced the increase in the repo rate continually in order to fight labor cost pressures.

The real problem in this particular case is the size of employment in public sector whereas wage expenditures (labor costs) are an important part of public spending as well as a tool for abuse emerging from discretionary increases in minimum wage which decreases the probability of higher employment growth since productivity is emptied by the increase in minimum wages.

Quite similar effect is resulted from health and dependency care where market agents react in accordance with satisfying the utility, comparing the overall alternative costs. In Sweden, for instance, welfare cheating is the most frequent when there are events such as World soccer championship. Leaving work when satisfying the utility is always a cost at the expense of productivity and creating value-added. As Sweden, France is no exception to generous welfare arrangements such as sick, work abuse, maternity leave and disability pay.

Structural crisis of the economy and society in French is far more probable than actually estimated. The size of public sector in France is huge, one of the biggest in OECD. France is also no exception to ageing population. In fact, public sector employees are permitted to retire before the age of 60 on a full pension under special pension regime.

”While young people suffer from especially difficult entry paths into employment, a striking characteristic of the French labour market is how quickly older people withdraw from it”
OECD, Economic Survey of France 2007 (link)

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