Why is French Equilibrium Unemployment so High : an Estimation of the WS-PS Model

Since the early-seventies to the mid-eighties, the rise of unemployment has been very regular in France. On the contrary, since the mid-eighties French unemployment has experienced fluctuations, sometimes important, but always around an average level that has remained very high. To give account of this evolution, equilibrium unemployment theories are a useful framework. In relation to the existing works, we provide here a multivariate estimation of the WS-PS model on macroeconomic quarterly data, which takes a large number of potential unemployment determinants into account. This permits us to give an enriched reading of French unemployment rise and of its persistence to a high level. Our estimation is made possible thanks to the use of a different methodology which rests upon the weak exogeneity properties of the variables. More precisely, we have estimated using a conditional VAR-ECM model, the relationships between unemployment rate, real labour cost and its determinants over the 1970-1/1996-4 period. The estimation leads to a rate of equilibrium unemployment nearing its effective level at the end of the period. The rise in equilibrium unemployment, by 10 points in 25 years, would be accounted for essentially by the rise of tax and social wedge, the slow down of labour productivity and by deterioration of job security. The terms of exchange which have essentially varied under the impact of oil crises and distortion between proposed and required qualifications on labour market, would only account for a slight part of the rise of equilibrium unemployment.