VZCZCXRO6691
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFR #4327/01 2960822
ZNR UUUUU ZZH
P 230822Z OCT 07
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC PRIORITY 0870
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/USDOC WASHDC PRIORITY
RHEHNSC/NSC WASHINGTON DC PRIORITY
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 02 PARIS 004327 
 
SIPDIS 
 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ELAB PGOV FR
SUBJECT: THE SARKOZY ECONOMIC AGENDA - LABOR MARKET REFORM 
 
REF: Paris 4315 
 
Summary 
------- 
 
¶1. (SBU) France's labor market rigidities are a key impediment to 
stronger growth and lower unemployment.  President Sarkozy has 
dusted off reforms proposed during his time as Finance Minister to 
jumpstart the French economy.  The key labor market initiative is a 
more flexible contract between workers and employers to replace the 
existing system of "permanent" and temporary contracts, and is now 
under negotiation between employers' associations and trade unions. 
Other proposals include a one-stop government employment department 
for all job-seekers, a system of declining unemployment benefits and 
tax exemptions on overtime (approved by Parliament last summer). 
Replacement of payroll taxes by a "social VAT" is also under 
consideration.  Sarkozy has promised to move forward on his own 
should negotiations fail to produce meaningful reform by year's end. 
 But his ability to do so will depend on his political momentum 
through the inevitable squalls that the opposition hopes will blow 
him off course.  This is the second of three updates on the Sarkozy 
economic program.  Reftel covered goods and service market reform. 
Septel will address fiscal reform.   End summary. 
 
France's labor market rigidities 
-------------------------------- 
 
¶2. (SBU) Improving the labor market is one of Sarkozy's major policy 
concerns.  French productivity is high, ranking third among OECD 
countries in 2004, and unit labor costs have been declining in 
recent years (-2.2% from 2000-2005).  However, the French economy 
remains shackled by high unemployment and structural impediments. 
The unemployment rate has fallen since the late 1990s to 8.6 percent 
according to Eurostat and to 8 percent according to French official 
statistics.  French employees worked fewer hours per year (1564 in 
2006) than in most OECD countries.  Only 62 percent of all 
working-age people are employed, with particularly high unemployment 
among youth and those nearing retirement age.  60 percent of those 
55 to 64 were no longer working, with 24 percent of youth aged 15 to 
24 unemployed, almost twice the OECD average.  France does a poor 
job of matching education to job opportunities, and suffers from 
shortages of workers with specific skills ranging from engineers to 
gardeners.  Piecemeal reforms of the labor market have been 
difficult to implement.  Most recently, former Prime Minister de 
Villepin's attempt in 2006 to introduce a more "flexible" work 
contract limited to first-time job seekers brought over a million 
young people into the streets in protest at what they perceived as a 
loss of job security, forcing him to abandon the proposal. 
 
 
A new work contract to illustrate "flexicurity"? 
--------------------------------------------- ---- 
 
¶3. (SBU) Sarkozy aims to create a French version of Northern 
European "flexicurity," following other European countries' success 
in employment gains through flexible labor markets and efficient 
support for job-seekers.  As a first step, he has asked the 
Employers' Federation MEDEF and France's five major unions to devise 
a new work contract to make layoffs less costly and burdensome, and 
to boost employability by providing paid training between jobs. 
Government sources and the MEDEF tell us that neither employers nor 
unions are enthusiastic about the single contract as a replacement 
for the current dual system of less protected short-term and 
highly-regulated long-term contracts.  Other proposals to boost 
flexibility such as buyouts and voluntary separation packages are 
also on the table.  It is too early to predict the outcome of these 
negotiations.  Regardless, Prime Minister Fillon's social advisor 
insisted to us recently, the government will move forward with its 
own measures should negotiations fail to produce concrete results by 
early 2008. 
 
A single government employment service 
-------------------------------------- 
 
¶4. (SBU) Along with a more flexible labor contract, the Sarkozy 
government is proposing to reform the state-run employment service. 
Oversight, training and more aggressive placement of job-seekers 
would be put in the hands of a single government agency to be formed 
by the merger of the current employment agency ANPE and the 
unemployment benefits agency UNEDIC.  Finance Minister Lagarde said 
recently the merger should take place in six months to a year.  This 
new department would guarantee benefits of up to 90 percent of 
salary for a laid-off employee in an initial phase as opposed to 50 
percent now, with declining benefits thereafter to create an 
incentive for reentry into the labor force. 
 
Exemptions on overtime 
---------------------- 
 
PARIS 00004327  002 OF 002 
 
 
 
¶5. (SBU) Tax exemptions on overtime work were passed in July as part 
of Sarkozy's initial package of tax cuts and economic reforms. The 
exemptions took effect on on October 1 and are intended to begin 
undoing the 35 hour workweek. Critics say that their limitations 
mean they will have little impact on French competitiveness. 
Employees working overtime are exempt from personal income tax on 
those hours, and employees and employers benefit from reduced 
payroll taxes on overtime work.  Companies with fewer than 20 
employees will pay no payroll taxes on overtime hours for workers in 
"low wage" positions.  At the same time, for companies with fewer 
than 20 employees, all overtime will be remunerated at a 25 percent 
premium compared with the current 10 percent.  The government has 
estimated that these cuts could cost 5-6 billion euros next year. 
It maintains however that in conjunction with fiscal and product 
market reforms the overtime measures will help achieve its aim of 
adding one percent to France's lackluster GDP growth rate. 
 
Pension reform 
-------------- 
 
¶6.  (SBU) Sarkozy's proposed reform of the French pension system, 
though primarily a budget issue, also supports his point that French 
workers need to work longer to maintain or increase their standard 
of living.  He has proposed requiring 40 years of contributions to 
qualify for full pension benefits in the public sector, in line with 
private sector norms.  He has also proposed reform of the "special 
regimes" that allow early retirement with full benefits to a number 
of once dangerous professions such as railway workers (see septel). 
The nationwide strikes October 18 dramatized opposition to these 
changes by those most affected by pension reform; so far they do not 
seem to have crystallized more generalized opposition to his labor 
market reforms. 
 
A Social VAT? 
------------- 
 
¶7. (SBU) The introduction of a social VAT (an increase in VAT rates 
that would allow the government to cut payroll taxes), first bruited 
in June, has been shelved, but not abandoned.  It is likely to 
resurface after next spring's municipal elections.  A proposal by 
Eric Besson, State Secretary for Economic Forecasting and Public 
Policy Assessment, would shift a portion of the burden of social 
security contributions paid by the employer to a hike in VAT rates, 
lowering wage costs for employers. 
 
Comment 
------- 
 
¶8. (SBU) Labor market reform will be the lynchpin to Sarkozy's 
economic reform agenda.  Absent a loosening of the rigidities in the 
system, it will be almost impossible for the government to achieve 
its 5 percent unemployment target by 2012.  Business contacts tell 
us Sarkozy's most important impact has come from his rhetoric in 
favor of changing attitudes toward work and job security.  Should 
negotiations on a more flexible labor contract fail, Sarkozy will 
have to expend political capital to push through meaningful change, 
or shift his emphasis to other aspects of his reform program.  An 
avowed pragmatist, Sarkozy will try to time individual measures and 
make tactical compromises to try to prevent opposition to individual 
measures from coalescing enough to block the forward momentum of the 
reform package as a whole.