The reform of unemployment insurance could increase inequalities and accelerate job polarization

The highly anticipated mechanisms for the unemployment insurance reform were presented to the social partners on Monday 21 November by Olivier Dussopt, Minister of Labour, following its adoption in Parliament a few days earlier.

It is a counter-cyclical project that has been revealed, with the main idea of ​​correlating the duration of unemployment benefits with business cycles. Thus, during a period of economic growth, the duration of compensation will be shorter than during a recession, provided that it takes less time to find work when the economy is doing well.

With this measure, the government pursues two goals: to ensure the financial balance of the unemployment insurance system and to promote the reduction of structural unemployment (which is not caused by the economic situation). Since 2009, the unemployment benefit system has actually been in deficit, with an expected return to balance by the end of 2022.

As for structural unemployment, it is measured between 7 and 8% of the working population in France, close to the euro area average, while it is around 5% in the countries of the Organization for Economic Co-operation and Development (OECD).

This reform is based on the assumption that too long a unemployment benefit period would be an obstacle to returning to work. In economics, this is what is called moral hazard: people receiving compensation would do a cost-benefit calculation and would see an advantage in receiving unemployment benefits without working rather than seeking or accepting a job. In other words, it would not be worthwhile to work given the too low additional income that one can hope for. Through this reform, the Labor Minister expects 100,000 to 150,000 people to return to work in a context of labor shortages in many sectors.

Economic studies, especially the book Improve unemployment insurance published in 2014 by the economists Stéphane Carcillo and Pierre Cahuc (Presses de Sciences Po), shows that job seekers intensify their job search at the end of the unemployment benefit period. When we also compare the compensation percentage, which relates unemployment benefit to the net salary of the insured person’s last job, we also find that the French system is very generous compared to other OECD countries.

Ineffective against mating problems

However, this reform does not take into account two problems: The first concerns territorial specificities. In fact, if we compare the average annual growth rates of GDP per per capita between 2000 and 2018 in the Île-de-France region and the Grand-Est region, we see that they are respectively 1.04% and 0.19% according to the National Institute of Statistics and Economic Studies (Insee). The different economic dynamics therefore lead to different difficulties in returning to work. However, the reform must apply everywhere in the same way.

But it is not only the regions that this reform seems to confuse. By including all unemployed people in the same category, mixing backgrounds, qualifications and forms of employment, the text does not take into account another problem: what economists call matching unemployment.

This denotes a situation where there is high unemployment while there are many vacant jobs. This discrepancy is explained by a mismatch between jobseekers’ qualifications and the jobs offered by employers. As a result, a job seeker, in a period of economic growth and faced with matching unemployment, would not benefit from the time necessary to find a position in line with these qualifications or to train. But getting a grant means that you can take the time to educate yourself, especially for the most precarious, who have to acquire new skills to meet the needs of the labor market, and who have not been able to put the money aside before.

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To observe this, economists have a special tool: the Beveridge curve, which describes the decreasing relationship between the unemployment rate and the unemployment rate. During periods of economic growth, the demand for labor increases, which increases the number of vacancies and promotes a decrease in unemployment. Vise versa, during a recession the demand for labor decreases, which causes the number of vacancies. Then there is an increase in unemployment.

We can measure the degree of labor market matching according to the location of the Beveridge curve relative to the origin. The closer the curve is to the origin, the less matching unemployment there is. In France, the fall in unemployment actually occurs in a context of an increase in the unemployment rate, proving that matching unemployment is significant.

However, the solution to matching problems is often training to enable job seekers to meet employers’ needs. And from this point of view, the reform can seem quite ineffective.

For the most uncertain, the more time to train

When we compare unemployment according to professional qualifications, we see that employees at bac+2 level have had a very low unemployment rate since 2015, around 5.3% in 2021, where it is 8.5% for employees with a baccalaureate or professional . aptitude Certificate (CAP), and 14.4% with a university certificate or no qualifications.

For the least qualified, the reform entails a risk of making their situation more precarious. It is actually the category that takes up the most part-time jobs, partly involuntary. This reform could therefore deepen inequalities by creating an under-skilling trap and enlarge the “halo of unemployment” (inactive people are not unemployed, but in a situation approaching it): insured persons, when their rights expire, will find themselves forced to accept a job or risk losing their income; it would then be more difficult to find time to take advantage of appropriate training to increase their skill level and therefore get out of this scheme.

In periods of economic growth, the time that the job seeker will be able to devote to education or retraining will therefore be reduced… except a priori for the most qualified. In fact, according to the human capital theory put forward by the American economist “Nobel” prize winner Gary Becker in 1964, income increases with the level of qualification, because the more this capital, which corresponds more or less to one’s level of education, is important in an individual, the more he is productive and the more his income increases.

Furthermore, as the British economist John Maynard Keynes pointed out, the more a person’s income rises, the more the share of his or her income is saved. This saving during unemployment can, however, constitute a supplement to the social security fund, which makes it possible to finance the search for a new job during education. In other words, the more you earned a high salary before you became unemployed, the more money you have on the side, and the more you can use it to train once you are free.

According to a report from Unedic published recently, it is also the most qualified unemployment insurance recipients who follow education. 58% have at least a matriculation level, compared to 46% of all recipients.

And the financial goal?

In summary, the reform planned by the government will encourage people to find a job as quickly as possible, with the risk that the most insecure unemployed will take jobs that require low qualifications. Then there may be a pause: this reform risks reducing the qualifications of the unemployed who do not have highly qualified jobs and accentuating the polarization of the labor market.

However, if the individual’s human capital deteriorates in an economy, it is long-term growth that is at stake, which ultimately calls into question the economic objective of the reform.

In order for this reform to be fair, we should therefore, in our view, not affect the duration of the compensation, but rather support and condition the unemployment insurance fund on further training for a better return to work, as is the case in Denmark after nine months per unemployment. Authorities should also consider geographical limitations, as limited labor mobility may imply the existence of local imbalances in the labor market. Finally, it is a matter of questioning the lack of attractiveness of certain professions where the working conditions or wages are too degraded, causing candidates to flee.

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