May 14th 2009
From the Economist Intelligence Unit ViewsWire
President Nicolas Sarkozy unveils ay pla"to tacklen youth unemploymen in Francet

Responding to a sharp rise in unemployment in recent months, particularly among young adults, the French president, Nicolas Sarkozy, has unveiled an “emergency plan” to help 700,000 young people find employment during the period up to mid-2010. The partly state-subsidised measures should provide a boost to work and training opportunities in the near term, but the underlying weaknesses of the labour market, not least the high rate of structural unemployment among young French adults, will remain.

The number of people out of work is rising rapidly in France. Registered unemployment rose by 63,000 people in March, to 2,448,000. The number of unemployed was 22.1% higher than in March 2008. Male unemployment rose by 31.5% over the year, to 1,281,000, while female unemployment increased by 13.3% to 1,168,000. Younger workers are bearing the brunt of the deterioration in the labour market. At the end of March there were 451,600 persons aged under 25 registered out of work, an increase of 35.8% year on year. According to Martin Hirsch, the government's high commissioner for the young, the number is likely to exceed 650,000 by the end of 2009.

In view of the sharp rise in unemployment in recent months, recent fears expressed by trade unionists and others over the risk of unrest on the country's streets could yet prove not to be wholly ill-founded. Such concerns explain the French president's recourse (yet again) to a hands-on approach to economic policy. Mr Sarkozy recently presented what he termed an "emergency plan" to help 700,000 young people to find employment during the period up to mid-2010. The plan provides for the creation on a large scale of new jobs under various types of employment contract, all of them partially subsidised by the state. The eventual cost of these measures is uncertain, but is expected to exceed €1bn.
You're hired?

One aim of the plan is a target to create 320,000 apprenticeships, compared with 285,000 in 2008. To this end, any company that recruits a young apprentice before June 30th 2010 will be exempt from paying social security charges for that person for a period of one year. Furthermore, small enterprises (with fewer than 50 employees) will receive an additional, direct subsidy of €1,800. A national advertising campaign will be launched to promote the apprenticeship scheme.

A second aim is to promote combined work and training opportunities. For example, the government hopes to finance 170,000 new contrats de professionnalisation (known as contrats pro) by mid-2010, up from 145,000 in 2008. Under this type of contract, work experience is alternated with formal training. As an incentive for companies to offer these contracts, the plan proposes a direct one-off subsidy, worth €1,000 for each person aged less than 26 who signs up. If the person has not achieved an educational qualification equivalent to the baccalauréat school certificate (academic or vocational), the subsidy is doubled to €2,000. These subsidies appear to supplement the one-off payment of €1,000 that, according to draft legislation currently before parliament, is to be provided directly to employees who sign a contrat pro with a small company.
Temp time

The president's employment plan also contains numerous measures to improve the prospects of young workers with temporary work contracts. For example, those on a two-month placement will benefit from a minimum wage of €400 per month, placing them on the same footing as placements for three months or longer. To encourage the transformation of placements into permanent employment contracts (contrats à durée indéterminée, or CDIs), enterprises making this change before the end of September will receive a payment from the state of €3,000 per head. It is hoped that this incentive will lead to the creation of 50,000 CDIs.

In addition, during the second half of 2009 the government will finance an additional 50,000 contrats initiative emploi (CIE)—another type of subsidised contract that was introduced in 2005 as a means of helping those experiencing chronic difficulty in finding work in the private sector.

Finally, the emergency plan aims to encourage recruitment by local government through financing 50,000 extra contrats d'accompagnement dans l'emploi (CAE). These contracts provide a state subsidy for the beneficiary's remuneration and training, and like the CIE are targeted at those experiencing chronic difficulty in finding work. One new element to these CAEs is that they will be geared to the acquisition of transferable skills that can be put to good use in the private sector (for instance, computing skills, childcare, property management). The national employment agency will be entrusted with the task of proposing future private-sector jobs to CAE beneficiaries.
Same old story?

High structural youth unemployment in France has been a problem for the past quarter of a century—the difficulties experienced by young French adults in progressing beyond a series of short-term placements or temporary work to obtain permanent jobs have been well charted. This problem is now being aggravated by the most severe economic downturn since the end of the second world war.

Although during his presidential election campaign Mr Sarkozy called for the state to reduce the number of subsidised employment contracts, there is little doubt that elements of the emergency package are warranted given the scale of the labour market crisis affecting many young adults in search of work. The problem facing the government over the medium term is how to tackle the politically difficult decision of reversing yet another expansion in state-subsidised employment, particularly if economic activity remains subdued over a protracted period.

From The Economist print edition
Lending to the poor has held up well but it is not as safe from the credit crisis as its champions hoped

A GLOBAL credit crisis caused by subprime mortgages is hardly the ideal backdrop for a business making unsecured loans to poor people without a credit history. Yet big microfinance companies, which do exactly that, seem to be in rude health. Mohammad Yunus, the unflappably optimistic founder of Grameen Bank in Bangladesh, a microfinance institution for which he won the Nobel Peace Prize in 2006, is adamant that business remains unscathed. “We have not been touched in any way by the financial crisis,” he said on a recent visit to Japan. “The simple reason is because we are rooted to the real economy—we are not paper-based, paper-chasing banking. When we give a loan of $100, behind the $100 there are chickens, there are cows. It is not something imaginary.”


He is not alone in thinking that microfinance is insulated from the problems of the global economy. Its proponents argue that any similarity with subprime loans is misleading. Microfinance institutions (MFIs) lend relatively small sums of money to people in developing countries to start small, profitable businesses, not to buy overpriced homes. Many of those businesses serve local needs, which has more merit at a time when exports are collapsing. And microfinance’s reliance on peer pressure for repayment must be the envy of any mainstream banker struggling with rising foreclosures and “jingle mail”; delinquency rates are microscopic.

Some MFIs, however, do not enjoy the same isolation that their borrowers do. Many of them are funded internationally. According to the Consultative Group to Assist the Poor (CGAP), a research centre in Washington, DC, foreign-capital flows into microfinance tripled between 2004 and 2006. About half the industry’s funding comes from aid budgets, but the share of private money is growing. The World Bank’s private arm, the International Finance Corporation (IFC) gave 55% more each year to microfinance lenders between 2004 and 2007. MFIs, especially those in eastern Europe and Central Asia, also borrowed from foreign banks. Meanwhile the microfinance portfolios of private investment funds grew from $600m in 2004 to $2 billion in 2006.

Funding from development institutions like the IFC is likely to be stable, but aid budgets are being cut and other sources of funding are threatened, too. Kimanthi Mutua, who runs K-Rep Bank, a big Kenyan microlender, says that in 2007 he fielded calls from prospective investors every couple of weeks. For the past six months he has not had a single call. According to CGAP’s Elizabeth Littlefield, borrowing costs have risen by up to four and a half percentage points in some markets. Foreign-currency borrowers may have exchange-rate fluctuations to cope with. And some global banks are pulling out altogether. Even MFIs that borrow locally may find their banks’ funding is constrained by global conditions.

An even more pressing concern is refinancing existing debt. Most MFIs have loans with one- or two-year tenures. According to the IFC, there is a potential refinancing gap of $1.8 billion over the next 18 months. The IFC and the German government have put together a $500m fund to help microfinance firms with refinancing.

All this, some experts argue, should encourage the institutions to start raising funds by collecting deposits rather than relying on fickle markets or donors. In Africa many MFIs already do this. The slow slog of attracting depositors can be off-putting, however, and may become harder if the crisis deepens. The World Bank estimates that worsening economic conditions could push an additional 65m people under the $2-a-day poverty line. These people—formerly known as the “nearly poor”—were just the sort whose savings deposit-taking MFIs had hoped to target.

The squeeze on credit could expose additional frailties in the microfinance model. Many observers suspect that at least some microfinance loans actually finance consumption, not investment, and that borrowers use new loans from one MFI to pay off their debts with another. As long as new credit is readily available, this strategy works—much as paying off one credit card with another once did in the rich world. But the credit crunch may expose this as a problem, reckons Justin Oliver, who runs the Centre for Microfinance, a research centre in Chennai, India. Meanwhile, the IFC reports that data from the top 150 microfinance institutions show that the share of borrowers 30 days delinquent on their loans has increased from 1.2% before the crisis to between 2% and 3% now. This is still very low by most standards and Mr Yunus says that repayment rates at Grameen remain impeccable. But the worry is that a prolonged credit crunch could make microfinance clients start to look more like those hapless subprime borrowers.

Economist.com

The world economy faces the biggest rise in unemployment in decades. How governments react will shape labour markets for years to come

LAST month America’s unemployment rate climbed to 8.1%, the highest in a quarter of a century. For those newly out of a job, the chances of finding another soon are the worst since records began 50 years ago. In China 20m migrant workers (maybe 3% of the labour force) have been laid off. Cambodia’s textile industry, its main source of exports, has cut one worker in ten. In Spain the building bust has pushed the jobless rate up by two-thirds in a year, to 14.8% in January. And in Japan, where official unemployment used to be all but unknown, tens of thousands of people on temporary contracts are losing not just their jobs but also the housing provided by their employers.


The next phase of the world’s economic downturn is taking shape: a global jobs crisis. Its contours are only just becoming clear, but the severity, breadth and likely length of the recession, together with changes in the structure of labour markets in both rich and emerging economies, suggest the world is about to undergo its biggest increase in unemployment for decades.

In the last three months of 2008 America’s GDP slumped at an annualised rate of 6.2%. This quarter may not be much better. Output has shrunk even faster in countries dependent on exports (such as Germany, Japan and several emerging Asian economies) or foreign finance (notably central and eastern Europe). The IMF said this week that global output will probably fall for the first time since the second world war. The World Bank expects the fastest contraction of trade since the Depression.

An economic collapse on this scale is bound to hit jobs hard. In its latest quarterly survey Manpower, an employment-services firm, finds that in 23 of the 33 countries it covers, companies’ hiring intentions are the weakest on record (see chart 1). Because changes in unemployment lag behind those in output, jobless rates would rise further even if economies stopped contracting today. But there is little hope of that. And several features of this recession look especially harmful.

The credit crunch has exacerbated the impact of falling demand, pressing cash-strapped firms to cut costs more quickly. The asset bust and unwinding of debt that lie behind the recession mean that eventual recovery is likely to be too weak to create jobs rapidly. And when demand does revive, the composition of jobs will change. In a post-bubble world indebted consumers will save more and surplus economies, from China to Germany, will have to rely more on domestic spending. The booming industries of recent years, from construction to finance, will not bounce back. Millions of people, from Wall Street bankers to Chinese migrants, will need to find wholly different lines of work.

For now the damage is most obvious in America, where the recession began earlier than elsewhere (in December 2007, according to the National Bureau of Economic Research) and where the ease of hiring and firing means changes in the demand for workers show up quickly in employment rolls. The economy began to lose jobs in January 2008. At first the decline was fairly modest and largely confined to construction (thanks to the housing bust) and manufacturing (where employment has long been in decline). But since September it has accelerated and broadened. Of the 4.4m jobs lost since the recession began, 3.3m have gone in the past six months. Virtually every sector has been hit hard. Only education, government and health care added workers last month.

So far, the pattern of job losses in this recession resembles that of the early post-war downturns (starting in 1948, 1953 and 1957). Those recessions brought huge, but temporary, swings in employment, in an economy far more reliant on manufacturing than today’s. As a share of the workforce, more jobs have been lost in this recession than in any since 1957. The pace at which people are losing their jobs, measured by the share of the workforce filing for weekly jobless claims, is much quicker than in the downturns of 1990 and 2001 (see chart 2).

The worry, however, is that the hangover from excess debt and the housing bust will mean a slow revival—looking more like the jobless recoveries after the past two downturns than like the vigorous V-shaped rebounds from the early post-war recessions. Ominous signs are a sharp increase in permanent-job losses and a rise in the number of people out of work for six months or more to 1.9% of the labour force, near a post-war high.

Official forecasts can barely keep up. In its budget in February the Obama administration expected a jobless rate of 8.1% for the year. That figure was reached within the month. Many Wall Street seers think the rate will exceed 10% by 2010 and may surpass the post-1945 peak of 10.8%. Past banking crises indicate an even gloomier prognosis. A study by Carmen Reinhart of the University of Maryland and Ken Rogoff of Harvard University suggests that the unemployment rate rose by an average of seven percentage points after other big post-war banking busts. That implies a rate for America of around 12%.

Moreover, the official jobless rate understates the amount of slack by more than in previous downturns. Many companies are cutting hours to reduce costs. At 33.3 hours, the average working week is the shortest since at least 1964. Unpaid leave is becoming more common, and not only at the cyclical manufacturing firms where it is established practice. A recent survey by Watson Wyatt, a firm of consultants, finds that almost one employer in ten intends to shorten the work week in coming months. Compulsory unpaid leave is planned by 6% of firms. Another 9% will have voluntary leave.

Europe’s jobs markets look less dire, for now. That is partly because the recession began later there, partly because joblessness had been unusually low by European standards and partly because Europe’s less flexible labour markets react more slowly than America’s. The euro area’s unemployment rate was 8.2% in January, up from 7.2% a year before. That of the whole European Union was 7.6%, up from 6.8%. For the first time in years American and European jobless rates are roughly in line (see chart 3).

Within the EU there are big variations. Ireland and Spain, where construction boomed and then subsided most dramatically, have already seen heavy job losses. Almost 30% of Ireland’s job growth in the first half of this decade came from the building trade. Its unemployment rate has almost doubled in the past year. In Britain, another post-property-bubble economy, the rate is also rising markedly. At the end of last year 6.3% of workers were jobless, up from 5.2% the year before. Figures due on March 18th are likely to show unemployment above 2m for the first time in more than a decade.

In continental Europe’s biggest economies, the consequences for jobs of shrivelling output are only just becoming visible. Although output in Germany fell at an annualised rate of 7% in the last quarter of 2008, unemployment has been only inching up. The rate is still lower than it was a year ago. Even so, no one doubts the direction in which joblessness is heading. In January the European Commission forecast the EU’s jobless rate to rise to 9.5% in 2010. As in America, many private-sector economists expect 10% or more.

Structural changes in Europe’s labour markets suggest that jobs will go faster than in previous downturns. Temporary contracts have proliferated in many countries, as a way around the expense and difficulty of firing permanent workers. Much of the reduction in European unemployment earlier this decade was due to the rapid growth of these contracts. Now the process is going into reverse. In Spain, Europe’s most extreme example of a “dual” labour market, all the job loss of the past year has been borne by temps. In France employment on temporary contracts has fallen by a fifth. Permanent jobs have so far been barely touched.

Although the profusion of temporary contracts has brought greater flexibility, it has laid the burden of adjustment disproportionately on the low-skilled, the young and immigrants. The rising share of immigrants in Europe’s workforce also makes the likely path of unemployment less certain. As Samuel Bentolila, an economist at CEMFI, a Spanish graduate school, points out, the jump in Spain’s jobless rate is not due to fewer jobs alone. Thanks to continued immigration, the labour force is still growing apace. In Britain, in contrast, hundreds of thousands of migrant Polish workers are reckoned to have gone home.

Despite having few immigrants, Japan is also showing the strains of a dual labour market. Indeed, its workforce is more starkly divided than that of any other industrial country. “Regular” workers enjoy strong protection; the floating army of temporary, contract and part-time staff have almost none. Since the 1990s, the “lost decade”, firms have relied increasingly on these irregulars, who now account for one-third of all workers, up from 20% in 1990.

As Japanese industry has collapsed, almost all the jobs shed have been theirs. Most are ineligible for unemployment assistance. A labour-ministry official estimates that a third of the 160,000 who have lost work in recent months have lost their homes as well, sometimes with only a few days’ notice. Earlier this year several hundred homeless temporary workers set up a tent village in Hibiya Park in central Tokyo, across from the labour ministry and a few blocks from the Imperial Palace. Worse lies ahead. Overall unemployment, now 4.1%, is widely expected to surpass the post-war peak of 5.8% within the year. In Japan too, some economists talk of double digits.

In emerging economies the scale of the problem is much harder to gauge. Anecdotal evidence abounds of falling employment, particularly in construction, mining and export-oriented manufacturing. But official figures on both job losses and unemployment rates are squishier. Estimates from the International Labour Organisation suggest the number of people unemployed in emerging economies rose by 8m in 2008 to 158m, an overall jobless rate of around 5.9%. In a recent report the ILO projected several scenarios for 2009. Its gloomiest suggested there could be an additional 32m jobless in the emerging world this year. That estimate now seems all too plausible. Millions will return from formal employment to the informal sector and from cities to rural areas. According to the World Bank, another 53m people will be pushed into extreme poverty in 2009.

History implies that high unemployment is not just an economic problem but also a political tinderbox. Weak labour markets risk fanning xenophobia, particularly in Europe, where this is the first downturn since immigration soared. China’s leadership is terrified by the prospect of social unrest from rising joblessness, particularly among the urban elite.

Given these dangers, politicians will not sit still as jobs disappear. Their most important defence is to boost demand. All the main rich economies and most big emerging ones have announced fiscal stimulus packages.

Since most emerging economies lack broad unemployment insurance, the main way they help the jobless is through labour-intensive government infrastructure projects as well as conditional cash transfers for the poorest. China’s fiscal boost includes plenty of money for infrastructure; India is accelerating projects worth 0.7% of GDP. However, a few emerging economies have more creative unemployment-insurance schemes than anything in the rich world. In Chile and Colombia formal-sector workers pay into individual unemployment accounts, on which they can draw if they lose their jobs. Many more countries have created prefunded pension systems based on individual accounts. Robert Holzmann of the World Bank thinks people should be allowed to borrow from such accounts while unemployed. Several countries are considering the idea.

In developed countries, governments’ past responses to high unemployment have had lasting and sometimes harmful effects. When joblessness rose after the 1970s oil shocks, Europe’s governments, pressed by strong trade unions, kept labour markets rigid and tried to cut dole queues by encouraging early retirement. Coupled with generous welfare benefits this resulted in decades of high “structural” unemployment and a huge rise in the share of people without work. In America, where the social safety net was flimsier, there were far fewer regulatory rigidities and people were more willing to move, so workers responded more flexibly to structural shifts. Less than six years after hitting 10.8%, the post-war record, in 1982, America’s jobless rate was close to 5%.
Illustration by Dettmer Otto

Policy in America still leans towards keeping benefits low and markets flexible rather than easing the pain of unemployment. Benefits for the jobless are, if anything, skimpier than in the 1970s. Unemployment insurance is funded jointly by states and the federal government. The states set the eligibility criteria and in many cases have not kept up with changes in the composition of the workforce. In 32 states, for instance, part-time workers are ineligible for benefits. All told, fewer than half of America’s unemployed receive assistance. The benefits they get also vary a lot from state to state, but overall are among the lowest in the OECD when compared with the average wage.

America’s recent stimulus package strengthened this safety net. Jobless benefits have increased modestly, their maximum duration has been extended, and states have been given a large financial incentive to broaden eligibility. The package also includes temporary subsidies to help pay for laid-off workers’ health insurance. Even so, benefits remain meagre.

Housing is a far bigger drag on American job mobility. Almost a fifth of American households with mortgages owe more than their house is worth, and house prices are set to fall further. “Negative equity” can lock in homeowners, making it hard to move to a new job. A recent study suggests that homeowners with negative equity are 50% less mobile than others.

Europe’s governments, at least so far, are trying hard to avoid the mistakes of the 1970s and 1980s. As Stefano Scarpetta of the OECD points out, today’s policies are designed to keep people working rather than to encourage them to leave the labour force. Several countries, from Spain to Sweden, have temporarily cut social insurance contributions to reduce labour costs.

A broader group including Austria, Denmark, France, Germany, Hungary, Italy and Spain, are encouraging firms to shorten work weeks rather than lay people off, by topping up the pay of workers on short hours. Germany, for instance, has long had a scheme that covers 60% of the gap between shorter hours and a full-time wage for up to six months. The government recently simplified the required paperwork, cut social-insurance contributions for affected workers, and extended the scheme’s maximum length to 18 months.

Britain has taken a different tack. Rather than intervening to keep people in their existing jobs, it has focused on deterring long-term joblessness with a package of subsidies to encourage employers to hire, and train, people who have been out of work for more than six months.

Of all rich-country governments, Japan’s has flailed the most. Forced to confront the ugly reality of its labour market, it is trying a mixture of policies. Last year it proposed tax incentives for companies to turn temps into regular employees—a futile effort when profits are scarce and jobs being slashed. The agriculture ministry suggested sending the jobless to the hinterland to work on farms and fisheries. As Naohiro Yashiro, an economist at the International Christian University in Tokyo, puts it: “Although temporary and part-time workers are everywhere in Japan, they are thought to be a threat to employment practices and—like terrorists—have to be contained.”

Recently, a more ambitious strategy has emerged. The government is considering shortening the minimum work period for eligibility to jobless benefits. It is providing newly laid-off workers with six-month loans for housing and living expenses. It is paying small-business owners to allow fired staff to remain in company dorms. It is subsidising the salaries of workers on mandatory leave. It is paying firms for rehiring laid-off staff, and offering grants to anyone willing to start a new business.

Whether these policies will be enough depends on how the downturn progresses. For by and large they are sticking-plasters, applied in the hope that the recession will soon be over and the industrial restructuring that follows will be modest. Subsidising shorter working weeks, for instance, props up demand today, but impedes long-term reordering. The inequities of a dual labour market will become more glaring the higher unemployment rises. Politicians seem to be hoping for the best. Given the speed at which their economies are deteriorating, they would do better to plan for the worst.