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Despite a still elevated unemployment rate, our analysis
suggests that market conditions in France have become increasingly
tight.
We find the nominal wages are particularly sensitive to
measures of labor market slack, such as the number of
underemployed.
However, we estimate that other factors, such as labor
productivity, may have a larger role in determining wage dynamics
and may help to keep the pass-through effects on wages modest.
The French labor market has been a relatively bright spot since
the start of 2019. The number of jobs created in the private sector
during the first three months of the year (92,800) was the highest
since late 2017, a period when the economy was growing well above
potential , while the unemployment rate declined to a ten-year low
during that period.
How tight is the French labor market?
The official jobless rate only provides limited information
about labor market conditions at a given time. The standard measure
of unemployment does not include parts of the labor force who may
be willing to work longer hours or those who have dropped out of
the labor force altogether.
There are wider measures of labor market slack that help to
address these shortcomings. The "broad unemployment" rate,
equivalent to the U6 rate in the US, includes the all persons
marginally attached to the labor force and those employed part-time
for economic reasons.
The wider measure of unemployment (henceforth, the U6
unemployment rate) suggests that the slack in the labor market
stands at around 17.5% of France's labor force. The dynamics of
France's U6 rate also show an improving picture despite still being
elevated compared with other eurozone countries for which a full
set of data are available.
The decline in the unemployment rate is not the only
indicator pointing to increasing labor market
tightness
Business surveys point to increasing tightness in labor market
conditions. For example, the index measuring labor shortages in the
European Commission's quarterly survey has trended upwards since
early 2016 and stands well above its pre-crisis highs. This applies
for the three sectors for which the survey is compiled
(construction, industry, and services; see Chart 3).
Meanwhile, France's vacancy rate - which measures the number of
vacant job openings as a share of total vacancies during a
particular quarter - has increased steadily in the past five years
and currently stands at its highest level since at least 2003.
This suggests that labor market conditions in France have become
substantially tighter despite the unemployment rate remaining one
of the highest in the eurozone. This points to high structural
unemployment. Using the OECD estimate of France's non-accelerating
inflation rate of unemployment (NAIRU), it is possible to conclude
three things. First, France's NAIRU is high compared with other
eurozone countries. Second, the NAIRU remains above an average of
8.7% in the years leading up to the financial crisis. Third, the
difference between the observed unemployment rate and the NAIRU has
narrowed since peaking between 2013 and 2015, providing further
evidence of increasing labor market tightness.
Are tighter labor market conditions driving higher
wages?
French nominal wages (measured by the hourly wage index
published by the INSEE) have gradually trended upwards since the
start of 2015. Wage growth reached a near five-year high during the
fourth quarter of 2018 and accelerated even more during the first
three months of this year, although the first quarter figures were
distorted by one-off factors.
The relationship between France's unemployment rate and wages
seems to be not negligible. Regression analysis indeed suggests
that unemployment, alongside variables such as inflation and
productivity growth, is a significant variable when trying to
explain nominal wages. However, it also suggests that models'
explanatory power increases significantly when extra measures of
slack, on top of the official unemployment rate, are included.
Indeed, models including the U6 measure of unemployment clearly
overperform models using the official rate of unemployment. In our
proposed model, the difference between the official and U6
unemployment rates shows the highest explanatory power. This
suggests that nominal wages are particularly reactive to the extra
measures of slack, such as the number of underemployed and those in
the unemployment halo (which are classified as an inactive
population by the ILO).
Our analysis also suggests that, despite unemployment being an
important explanatory variable, productivity gains are the most
important determinant of wages. As employment creation has remained
strong despite decelerating output growth, growth in productivity
per hour has decelerated substantially in recent quarters,
suggesting that wage growth developments over the short term may be
weaker than implied by the fall in the unemployment rate.
Posted 02 August 2019 by Diego Iscaro, Senior Economist, Europe, IHS Markit Economics
