The Macron presidency is finally going to be able to unleash its full momentum. Talks between the government and trade unions on the broad trends for forthcoming changes to French labor legislation have taken up a good deal of time over the past few weeks. The government decrees were announced on August 31 and will come before the French Council of Ministers on September 21: the President’s term can now really get started.
The government’s aim is to make the labor market more adaptable to change by altering certain aspects of labor law. Continue reading →
The French government has made its first proposals to reform the labor market. Its main idea is that competitive conditions have dramatically changed and it’s impossible to have a law that can solve all the issues.
For the government a “one size fits all” law cannot exist anymore on the labor market. The main reason is that companies face now very different environments that lead to a very specific framework for each of them. Therefore it can be efficient to commit to rules at companies’ level. These specificities are globalization which can be a very different constraint from one sector to another one, technological shocks with very different speed of adjustment depending on the type of activity, regulation can be very different between firms and sectors, companies’ size from the very large company to a very small one is also an issue and specificities associated with different sectors can have an impact on companies’ behavior.
For the English salaryman, the situation is becoming more complex. The higher inflation rate is currently reducing the gap with the nominal wage growth (graph 1). The figure for wages in January shows an increase above 2% while the inflation rate is just a little below 2%.
From the end of 2009 to the end of 2014, the purchasing power of wages has dramatically decreased. Real wage is not back to its pre-crisis level. (graph 2)
The Brexit is currently starting will be a persistent negative shock on the economy. The changes in rules for the economic relationship between UK and the European Union will have a persistent negative effect on the economic activity and therefore on the labor market. Nominal wage growth will be limited while the inflation rate will remain high. As a consequence the external negative shock will not be compensated by a strong internal demand.
The situation will be hard to manage in the UK.
Key element of the week starting February 2
US employment has increased a lot during the last three months. The number of jobs creation was strong in January (+257 000) and the upward revisions in November and December were significant. This can be seen on the graph below.
The report was full of details that show a real improvement in the labor market.
The first is the change in regime since last April. It continues in January 2015 and reflects stronger numbers since April. The second point is the strong inflow on the labor market from people who were out of the market. This means that the labor market attractiveness has dramatically changed. This is a positive signal.
On another point of view the employment rate for people between 25 and 55 years of age is improving rapidly. These people have had a succession of negative shocks. Employment has dropped rapidly in this tranche of age. Step by step they are coming back on the market. The “25-55” employment rate is now at 77.2%. It is still 2.8% below the business cycle peak in January 2008. That’s a situation I was expecting in order to have a real perception that the situation is converging to a more normal trajectory. The fact that people are back to the labor market is the main reason to explain the marginal increase of the unemployment rate. With this in mind, this is a good signal.
But the trajectory is still far from its long-term equilibrium and that’s why there are no pressures on wages yet. The average wage rate grows at the reduced pace of 2.2%. Other Important Issues
The situation in Greece is still fragile. Last week trips to visit European governments have not been a real success. They still have to convince that a switch between the current situation which expired on February the 28th and a new contract will be profitable for everyone. Alexis Tsipras speech late on Sunday the 8th is still close to Syriza program. On Wednesday the 11th for the Eurogroup and the 12th with the heads of government, Varoufakis then Tsipras will have to find support. A failure would drive to increasing the probability of a Euro Area collapse. (more in the document) The ECB has changed the refinancing conditions for Greek banks. Government bonds and bonds with the government guarantee will not be eligible anymore. The ELA instrument will be available but be more expensive than the usual procedure.
PMI indices were almost stable in January for the manufacturing sector in developed countries. Nevertheless, the US ISM dropped for the manufacturing sector; probably the impact of a low oil price.
Composite indices in the USA and the Euro Area were stable for the first and improving for the second.
In these surveys, emerging countries are still weak. China is below 50 and Russia in recession
Strong improvement in retail sales for the Euro Area in the fourth quarter (strongest since Q4 2006).
For the whole year the US inflation rate was just 1.3% for the headline and 1.4% for the core measure. Far from the 2% target for the preferred Fed’s target.
Due to poor growth prospects and to low expectations on commodity prices, the Reserve Bank of Australia has reduced its interest rate by 25 bp to 2.25%
Industrial production was up in Germany for the 4th quarter (2.5% after -1% in Q3) – + 1.3% in 2014
Very large surplus for the Chinese external trade: USD 60bn – Drop in imports (commodities) is the main explanation. But exports dynamics was poor also (-3.3% on a year)
What will happen this coming week?
The main issue will be the two meetings on Greece (11 and 12)
GDP growth number for the Euro Area in the 4th quarter will be available on Friday
Retail sales in the USA (Thursday) and the inflation report in UK (Thursday)
Industrial production indices in Europe (France, UK, Italy, Euro Area)
Employment numbers for the 4th quarter on France (Friday)