Can better regulation reduce structural unemployment?

Twenty-eight percent: this figure represents the decline in mobile telecommunications prices recorded during the six years after the entry of a fourth operator into the market allowed by the 2012 reform of this sector. 1,620: this sum corresponds to the increase in the number of notaries allowed by the 2015 Law on Growth, Activity and Equal Economic Opportunities. 44,000: this amount constitutes the number of VTC drivers (transport cars with drivers) today, following the reform of passenger transport (taxis in particular), initiated by the 2009 Novelli law. These examples, among others, illustrate the important interactions between market regulations, increased competition, lower prices, and job creation. How many jobs would be created because of a change in product market regulation? This is the question raised by Cédric Crofils and Gauthier Vermandel using an original model developed for this study.

Regulation and competition: determining the right balance

Regulation of the product market, implemented by the government and other public agencies, is a necessity to protect the environment and guarantee access to public services. This market regulation has many facets: investing in the capital of certain strategic companies, notably the SNCF, La Poste or EDF; regulating prices for medicines or rents; and controlling  access to certain professions like nursery assistant, lawyer, and driving school.

However, poorly calibrated regulation restricts the entry of new competitors into a market, and the by-product leads to higher price levels from a lack of effective competition. By contrast, better regulation can be a key instrument to fostering growth and employment.

Cédric Crofils and Gauthier Vermandel estimate that the successive regulatory cuts introduced in France since 1998 have reduced the unemployment rate by two points, and increased the GDP level by two and a half points. To gather these statistics, the authors simulated a regulatory status quo situation, and compared it with the current situation by using a macroeconomic model developed for this study (this analysis complements the study of sectoral regulations conducted by the Treasury in 2017).

How is France doing ?

Can France regulate its product market more efficiently? Cedric Crofils and Gauthier Vermandel say yes. They argue that France could learn from the regulation experiences of its European neighbors, and follow the recommendations of international institutions that identify what constitutes "good practices" in terms of regulation.  France could further reform its product market to improve regulatory efficiency and promote employment-friendly competition.

To measure and compare the level of regulation in the goods and services market across countries, the OECD has developed a synthetic indicator: the PMR (Product Market Regulation). The PMR ranges from zero (no regulation) to six (the most restrictive regulation). The authors find that while France's PMR decreased by more than a third between 1998 and 2013, it remains higher than other European countries in 2018, with a score of 1.57, compared to 1.23 in average for the euro zone , 1.11 for Germany and 0.79 for the United Kingdom.

The analysis of international institutions converge: France could further reform the regulated professions. According to the OECD, these professions include notaries, lawyers, accountants, architects, engineers and real estate agents. It could also soften the rules governing the sale of medicines, opening hours or sales periods of supermarkets, and further open its rail sector to competition. In addition, it could simplify even more the practice of entrepreneurship in the spirit of the 2019 PACTE law.

What are the potential gains in economic growth and employment? According to the authors' calculations, "a realistic program of regulatory reforms" based on international recommendations could reduce the French unemployment rate by 0.5 to 0.7 percentage points, and increase GDP by at least 2% after five years.

Beyond these estimates, the analysis suggests that pro-competitive reforms could be a significant driver of the development of new businesses. It would lead to increased activity, hiring, and purchasing power for the consumer.