France's generous benefits stop unemployment cuts

[Blackleaf]

Aug. 24 (Bloomberg) -- Camille Grimault-Queret was fired in June as director of the 18-hole golf course in Saint-Germain-les- Corbeil, south of Paris. She wants to find more work -- as long as it's the perfect job.

Grimault-Queret, 31, can afford to be picky. She will collect a monthly unemployment check worth 57 percent of her former salary for as long as 23 months, and says she won't look at anything that isn't ``attractive'' until at least November.

France's generous jobless benefits, about three times those of the U.S. and the U.K., help explain the country's 10.1 percent unemployment rate -- double the rates in those countries. The benefits are among a set of labor policies that may pose the biggest obstacle to President Jacques Chirac's efforts to rekindle the economy and restore his tattered popularity.

Chirac's government has proposed to cut benefits for people who turn down jobs and to offer a 1,000-euro ($1,223) bonus to those who return to work within a year. The measures don't go far enough, says Eric Chaney, Morgan Stanley's chief European economist in London. ``As long as policy makers do not question the French social model, France will continue to suffer from high unemployment,'' he says.

France's jobless rate held at a 5-1/2-year high of 10.2 percent from March through May. The persistence of high unemployment is curbing spending by companies and consumers, says Laurence Boone, an economist in Paris for Barclays Capital.

Unsustainable

``France's unemployment rate is simply not sustainable,'' Boone says. ``Unemployment hangs over consumer confidence. It affects company investment. Soon you find yourself stuck, like Germany and Japan, in a structurally low growth rate that just isn't in line with the lifestyle the French aspire to.''

Consumer spending in France fell 0.3 percent in the second quarter, the most in more than eight years. It accounts for 55 percent of gross domestic product. Economic growth slowed to 0.1 percent in the quarter. The government had already cut its forecast for 2005 growth to no more than 2 percent.

Chirac, 72, charged Prime Minister Dominique de Villepin with getting the French back to work when he appointed him on May 31. That was two days after French voters rejected the European Union constitution, partly over fears it would weaken workers' rights. De Villepin, 51, gave himself 100 days, or until Sept. 9, to regain voters' confidence.

Chirac's approval rating hit a low of 24 percent after the defeat, according to a TNS-Sofres poll of 1,000 people conducted May 30 and May 31 for Le Figaro magazine.

1,000-Euro Bonus

De Villepin proposed a 4.5 billion-euro plan to increase employment, which the government approved on Aug. 2. The measures include loosening firing procedures for companies with fewer than 20 employees. The 1,000-euro bonus, which is for people who get a job after more than a year out of work and are on welfare, will take effect by the end of the month.

He has also earmarked 1.5 billion euros over three years to foster investment in areas such as biotechnology and telecommunications. And the government issued a decree reinforcing controls on jobseekers, allowing benefits to be reduced or cut off for those who refuse a job or can't prove they've been actively looking. Such sanctions have been rarely applied until now.

Even with those changes, employees will still enjoy vast protections and benefits. Companies with more than 600 employees can't fire workers without going through administrative procedures that last an average of 106 days, according to Mouvement des Entreprises de France, the country's largest business lobby, based in Paris.

Payroll Taxes

Corporations pay the highest payroll taxes in the 30 nations in the Organization for Economic Cooperation and Development, amounting to 28 percent of the average salary. That compares with 9 percent in the U.K. and 7 percent in the U.S., according to the Paris-based OECD.

Firing a 35-year-old employee, with six years on the job and a pretax monthly salary of 5,200 euros, costs 2.6 times more in France than in the U.K., according to a group of French executives working in Britain called Cercle d'Outre Manche, a reference to the English Channel that divides the two countries.

``In France, when you have to adapt your payrolls to a drop in business it takes a lot of time, it's often costly and can quickly become dramatic and emotional,'' says Gael Dutheil de la Rochere, who runs the U.K. unit of Schneider Electric SA, the world's biggest maker of circuit breakers.

In Britain, he says he doesn't hesitate to hire because he can just as easily fire. He's a member of the Cercle in London.

Impact on Europe

French unemployment isn't just bad for France. Unemployment in the 12 nations sharing the euro, at 8.7 percent in June, is near a six-year high. The European Central Bank in Frankfurt predicts the region's expansion will slow to about 1.4 percent this year, from 2 percent in 2004. If it does, Europe will lag behind the U.S. for the 13th year in 14.

In a bid to spur hiring in Germany, the government reduced the level of jobless benefits and made it easier for companies to fire workers. People who've been without a job for a year or more now have to accept any reasonable job offer or risk benefit cuts. The measures came into effect on Jan. 1.

Under Chancellor Gerhard Schroeder's plan, as many as 360,000 people who had been classified as social-welfare recipients had to re-register as unemployed and seek work. That helped boost unemployment to a post-World War II high of 12 percent in March.

Reflecting the economic slowdown, yields on French bonds have dropped to the lowest in more than 60 years. The yield on 10-year French debt fell to 3.106 percent in trading on June 24, the lowest since World War II, according to data compiled for France's debt management agency.

A Perfect Policy

Chirac has tried to tinker with France's welfare state before, while rejecting the model of the U.K., where record employment has helped underpin 52 straight quarters of growth.

``Great Britain has another policy that is perfect for Great Britain, but which wouldn't be accepted here for social reasons,'' he said in a May 3 interview on France 2 television.

Over the past two years, Chirac has watered down the 35-hour workweek, allowing employees to work as many as 48 hours a week for more pay. In December 2004, Parliament approved a five-year plan of tax breaks and new spending to spur hiring.

Still, unemployment is little changed from when he first took office in 1995. It will probably be an important issue ahead of national elections in 2007 that may pit Chirac or De Villepin against Nicolas Sarkozy, 50, the leader of their Union for a Popular Movement party. On June 11, Sarkozy, who is now deputy to De Villepin as interior minister, called creating jobs an ``absolute and urgent priority.''

No Room for Maneuver

The cost of unemployment benefits has contributed to ballooning debt and budget deficits. France's debt will reach a record 66 percent of gross domestic product, or 1.1 trillion euros, this year, according to the Finance Ministry. Tax collections will almost equal the cost of paying interest in 2006. The country's budget deficit has breached the EU's limit of 3 percent of GDP for three years running.

``The cost of debt is taking away all our room for maneuver,'' Finance Minister Thierry Breton, 50, said in a briefing in Paris on June 21 as he cut the country's growth forecast. ``To finance our model, we need to work more.''

When French people do work, they devote less time to it than their European neighbors. They work an average of 39.1 hours per week, the least among the 25 EU countries, according to Eurostat, the EU's Luxembourg-based statistics office. That compares with 42.2 hours in the U.K. and 42.6 hours in Poland.

U.K., U.S.

Unemployment benefits in France equal 57 percent to 75 percent of a jobseeker's last salary, with a ceiling of 5,126 euros a month. They can last for as long as three years, and sometimes longer for people nearing retirement.

In the U.S., recipients of jobless benefits receive the equivalent of about half of their last salary to a maximum of $2,000 in the highest-paying state, Washington. Benefits expire within six months in most states.

The French can expect jobless benefits and other government support such as housing subsidies to amount to 44 percent of the former salary, compared with 17 percent in the U.K. and 14 percent in the U.S., according to the OECD. The calculations are based on comparisons of three different family situations with varying levels of earnings and duration.

The U.K. jobless rate was 4.7 percent in June; in the U.S., the level in July was 5 percent, an almost four-year low.

Protesting Cuts

``We must recreate the incentive to work for those who can but don't want to work, and we must lower the cost for those who wish to,'' says Alain Minc, head of AM Consulting in Paris and co-author of this year's book ``Unemployment: Who's at Fault?''

Bringing about change in France is difficult, because the French are passionate about defending workers' rights.

Chirac reversed course and raised civil servants' salaries after a nationwide strike March 10 that disrupted trains, schools and hospitals. Workers at state-owned utility Electricite de France SA have gone on strike at least eight times this year to protest government plans to sell shares. Rail workers have walked out four times this year. One-quarter of France's labor force is composed of government workers.

Even people with jobs, such as Gerard Re, who works for private defense electronics contractor Alcatel Space in Cannes on the French Riviera, take to the streets to protest benefit cuts. He traveled to Paris on June 9 to march against De Villepin's plans, which he says will weaken the safety net for workers by obliging them to take on several poorly paid, undesirable jobs to survive.

``It's the old recipes that have already proved to be useless,'' says Re, 37. ``It all depends on what you seek in an economy: creating wealth for the sake of it or having people who work and are happy with their life and their job.''

Grimault-Queret, who's seeking a job in sports management or public relations, says she's willing to expand her search to sales positions if necessary.

``It's normal that I have the right to receive my unemployment benefits for a few months,'' Grimault-Queret says, during her one- week August vacation in Biarritz. ``I've always worked.''

www.bloomberg.com . . .