[Excerpt] Over the last decades, many European countries have experienced high and persistent unemployment rates. The bulk of labour market research has tackled this issue by emphasizing the effect of employment protection legislation, hereafter EPL, on labour market performance. As a result, the importance of labour market flexibility has been widely acknowledged. This view can be summarized by the expressed desire of the E.U. council to give member States incentives to “review and, where appropriate, reform overly restrictive elements in employment legislation that affect labour market dynamics [...] and to undertake other appropriate measures to promote a better balance between work and private life and between flexibility and security”. It is however striking that most of the reforms undertaken have contrasted sharply with this latter recommendation by favouring reforms at the margin.
Those reforms have fostered two-tier systems, as the increase in labour market flexibility has taken place mainly through a series of marginal reforms that liberalized the use of fixed-term and/or non-standard employment contracts. Two-tier systems have promoted the emergence of dual employment protection which can be broadly defined as the coexistence of both long-term contracts, which benefit from stringent protection, and short-term contracts with little or no protection. It is often argued that this combination creates labour market segmentation, traps workers in a recurring sequence of frequent unemployment spells, favours unequal repartition of risk between workers and enhances inequalities. In particular, two-tier systems create excess labour turnover as they increase the incentives to create temporary rather than permanent jobs, reduce job destruction for stable jobs, but increase churning for temporary jobs. For instance in countries with stringent legal constraints on the termination of permanent jobs, such as France or Spain, it turns out that about 70 per cent to 90 per cent of entries into employment are in temporary jobs with very short duration (on average less than one month and a half in France). If excess labour turnover and its consequences are a concern for the economy as a whole, the dramatic spread of temporary jobs is even more a concern for young/less experienced workers as they are more likely to be negatively affected by the adverse effects of dual employment protection.
The French labour market is no exception and has faced similar trends during the 1990s. Given the pervasiveness of temporary jobs on the labour market and their consequences on the society and economic outcomes, it is urgent to understand how two-tier systems shape the functioning of the labour market. This is the very purpose of the present report.
After having described in details the salient features of the French dual labour market and having discussed the legislation at the root of French dualism, we review the different mechanisms through which dualism affect labour markets: labour market dynamics, wage inequality, human capital accumulation, job satisfaction, social integration and health. We consider whenever possible both theoretical insights and empirical evaluations. We finally conclude this report by providing possible directions to reform the labour market.