Institutional settings and public policies can play a crucial role in influencing school-to-work transitions. As shown above, the French youth-to-adult unemployment ratio—as well as the NEET rate—are about twice as high as in Germany. We therefore assess which labor market institutions and labor policies can explain these structural differences. Our analysis focuses on the following issues: a) vocational education and training; b) minimum wages and employment protection; and c) activation measures and labor policies. In addition, as labor market entry poses a particular challenge for low-qualified youths, our subsequent analysis has a special focus on this population group.
Vocational education and training
Education plays a key role in the risk of becoming unemployed or inactive. For instance, in France, 85 percent of NEETs have not studied beyond secondary school. This is even more worrisome as the school dropout rates are particularly high and continue to worsen. More than 150,000 young people, or 20 percent, leave the school system each year without any qualifications.
Many studies show that vocational education and training is able to smooth the transition from school to work (see, e.g., Eichhorst et al., 2012, for an overview). Hence, it is not surprising that training in combination with practical (subsidized) work experience in the private sector is the most efficient way to ensure sustainable unsubsidized employment, whereas employment in the public sector has no significant impact (Card et al., 2010).
Like Austria and Switzerland, Germany has a dual apprenticeship system. Besides the standard curricula, these three countries have established a professional system combining work experience, on-the-job training and classroom teaching (the last is usually provided in a special type of school such as the Berufsschule in Germany). In these countries, this form of vocational training represents the main path of transition from school to work. For example, about two-thirds of the youths completing general schooling each year enter the dual apprenticeship system in Germany and about one-fifth participate in full-time vocational schooling (Biavaschi et al., 2012). In addition, the share of apprentices who stay in the same firm after completing their apprenticeship has been about 60 percent in recent years (Grunau, 2011). These figures demonstrate the importance and success of this system in Germany.
German apprentices typically sign a three year training contract with a firm, in which they alternate between school- and firm-based training.2 Over 50 percent of all companies with at least one employee are entitled to conduct this type of training. In addition, apprenticeship training is provided in basically all sectors of the economy. Firms bear the costs of workplace training facilities and pay apprentices a standardized salary (about €600 to €700 per month in 2011). The firms’ incentives to provide this form of training include the accumulation of firm-specific human capital, using it as a screening device, and demonstrating social commitment.
The returns to completing dual apprenticeship training are significant in Germany. Not only do roughly two-thirds of those who successfully complete training subsequently enter employment, but participants also have a faster entry into the labor market when compared to those in school-based vocational training (Parey, 2009). Furthermore, the dual apprenticeship system significantly improves wages and employment stability when compared to individuals with “schooling only” (Adda et al., 2011). After 3 to 4 years, about 80 percent are employed (of whom 60 to 70 percent are in “stable” employment relationships). Their wage profile is similar to university students in early years, but flatter in later years. For example, Clark and Fahr (2001) estimate substantial annual returns to apprenticeship training and also provide evidence supporting the transferability of training across occupations.3
Nevertheless, even though the German dual apprenticeship can be regarded as a success story, there are also challenges that this system faces. One challenge is related to problems of demand and supply. More specifically, employers’ willingness to train is correlated with economic conditions and thus, the availability of apprenticeship positions follows a cyclical pattern. Furthermore, firms prefer committed and engaged apprentices. They mostly require a minimum level of “trainability” which some youths are unable to meet. Hence, there are limited options for low-qualified youths. Youths with low schooling have no other training option than participating in the dual apprenticeship system. Youths unable to enter this system thus face a high risk of marginalization. The current solution to this problem is the extensive provision of “preparatory” training programs, although the most disadvantaged do not benefit (Caliendo et al., 2011).
As a more general challenge, dual apprenticeship systems rely on the broad support of employers, trade unions and the government for regulation and financing. In particular, their success critically depends on the trade unions’ willingness to accept apprenticeship contracts which are paid below the level of standard contracts—in exchange for a commitment from employers to offer practical training. The support of the government involves not only developing special vocational schools and training qualified teachers, but also offering preparatory training for young people who are not yet ready to start an apprenticeship after leaving school. This “pre-apprenticeship” training is essential for low-qualified young people—in particular, when access to the dual system is as competitive as it is in Germany (Caliendo et al., 2011). As a consequence of such broad support, vocational training via apprenticeships is widely recognized by young people, their parents and society as a solid pathway to employment in Germany, Austria and Switzerland.
An apprenticeship system is also in place in France. Students pursuing the vocational track within the education system can either enroll in full-time vocational schooling or in on-the-job apprenticeships with part-time study at training centers. Both routes prepare students for the same tests and diplomas. The number of young people beginning apprenticeships has doubled over the last 20 years (Cahuc et al., 2013). However, this increase during the last 10 years is entirely due to relatively qualified young people, i.e., youths who already hold an equivalent or better diploma than the secondary school leaving exam. Although various forms of direct subsidies to employers hiring apprentices exist (e.g., exemptions from social security contributions, hiring bonuses), some businesses, in particular small firms, are reluctant to hire apprentices. Course content and expectations for the final exam prove to be an additional challenge. For example, while reading and mathematics can be regarded as essential skills for any job, it appears questionable whether the performance in primarily academic subjects should be decisive to obtaining a diploma—at least, as long as the purpose of the diploma is not to access higher education.
However, one should not expect immediate results from any changes to the French model. For example, the German apprenticeship model was developed over decades through close and continuous dialogue with the social partners aimed at establishing and regularly updating training courses for each type of qualification. This model has ensured that every detail is discussed and negotiated, including the duration of apprenticeships, expectations for the final exam, course contents and pay levels.
Minimum wages and employment protection
Labor costs can be an important barrier in the transition from school to work—in particular for low-qualified job seekers. A number of studies show the detrimental employment effects for young people when a minimum wage is set too high (Abowd et al., 2000; Kramarz and Philippon, 2001; Neumark and Wascher, 2008).4 As a general rule, studies on labor demand effects estimate that a 1 percent increase in labor costs reduces employment of the low-skilled, a group in which unemployed youths represent a large proportion, by 1 percent (Cahuc and Carcillo, 2012).
Labor costs in France are characterized by a minimum wage level that is the highest amongst OECD countries with regards to 20 year-old workers (Cahuc et al., 2013). Monthly labor costs at the current French minimum wage amount to €1,616 for a full-time position. This creates not only a substantial barrier for low-skilled job seekers to access employment, but it is also a complex issue for society. A large number of young people in France are not sufficiently qualified to be as productive as the minimum wage requires them to be.5 This certainly limits their chances of finding a job. While other countries allow a reduced minimum wage for young people compared to adults, France has not adopted such an approach—apart from select exceptions.6
Germany follows a different approach. There is no national statutory minimum wage, but minimum wages are negotiated by industry and occupation among the social partners. They can be declared as legally valid for a whole market segment by a governmental commission. In principle, the state does not intervene in this process much, at least so far.7 Figure 7 displays the result. Excluding apprentices, 30 percent of low-skilled young Germans who are employed have labor costs between €7 and €10 per hour. However, it should be noted that the German welfare system generates an implicit minimum wage, which may similarly act as a barrier to access employment for youths. Müller and Steiner (2009) calculate the implicit minimum wage as the hourly wage which would yield the same net income in a full-time job as long-term unemployment benefits. They find an implicit minimum wage of less than €5 per hour (around €600 per month) for singles without children, which is the typical situation for youths in Germany.8 Moreover, if youths still live in a household with their parents, they will typically have no access to these benefits since eligibility is assessed at the household level. Welfare generosity should thus not provide disincentives for German youths.
A related argument in the German context is that job quality has deteriorated in general, with an increased segmentation of the labor market and an increased share of low-pay work. However, these issues are not particularly age-related, but are rather driven by skill levels and occupational change (Eichhorst et al., 2013b, p.81). The vast majority of skilled younger workers still have decent prospects of entering open-ended contracts in Germany. This is also the case for those who have successfully completed a dual apprenticeship.
Nevertheless, there is a popular myth that German labor market reforms have created a growing low-wage sector with precarious jobs. The introduction of a statutory minimum wage thus appears as the “silver bullet” in the political sphere to combat this unintended side effect. However, who would actually be affected by—and potentially benefit from—a minimum wage of €8.50 or €10? These are the values currently being discussed. Figure 8 shows that actually only a small fraction of full-time employees would be affected. On the other hand, larger fractions which would be affected include the marginally employed, pupils, students, pensioners, unemployed, employees in jobs requiring no formal qualifications and younger workers.
As a result, even a relatively high minimum wage of €10 would reduce income inequality only by 1 percent (Brenke and Müller, 2013). There are a number of reasons why this is the case. Low-wage employees are not concentrated in poor households, but are rather distributed along the net household income distribution. Many are secondary earners contributing additional income to relatively rich households. Hence, the effects of a minimum wage would be cushioned by the tax and transfer system as many low-wage earners face high marginal tax rates. Effects on income inequality would then be even lower assuming that a minimum wage increases the risk of becoming unemployed for the individuals who are affected. Moreover, this increasing risk may be particularly concentrated among young individuals who enter the labor market for the first time.
Ideally, the labor market gradually compensates for inequalities resulting from different initial education levels by allowing non-graduates to acquire professional skills on-the-job. However, this is not the case in France. Unlike many comparable countries, where inequalities resulting from different initial education levels gradually dissolve, the French labor market actually tends to emphasize them. This is related to the strong and increasing segmentation of the French labor market. On the one hand, there are employees in permanent contracts, protected by many rules, which ineffectively protect employees as well as result in very uncertain outcomes for employers, often leading to contentious litigation. On the other hand, there are employees on fixed-term contracts for which the terms and costs are precisely known in advance. Importantly, this dualism has increased since the early 1990s and today more than 90 percent of employees are hired on fixed-term contracts.9
In France, this segmentation of the labor market affects young people more strongly than in other countries. In 2009 fixed-term employment was five times higher for young people than for adults (Cahuc et al., 2013). In comparison, this ratio is around three for Denmark, the United Kingdom as well as the average in OECD countries. Only in Austria, Germany and Switzerland does this ratio exceed the one in France. As described above, this can be explained by the fact that these three countries have a long tradition of dual apprenticeship systems. In these countries, temporary employment of young people is thus not necessarily synonymous with job insecurity, but rather part of their vocational education.
Historically, the increasing use of fixed-term contracts in France coincided with rising youth unemployment. The reason why a strict separation between permanent and temporary jobs may create additional unemployment is quite obvious. As terminating an open-ended contract is expensive and accompanied by legal complexity which causes great uncertainty, French firms increasingly rely on fixed-term contracts. This type of employment is much easier to handle, and therefore firms are adopting it more and more. Many firms therefore “turn” towards short, or even very short, fixed-term contracts. Therefore, often in between two fixed-term contracts, workers register as unemployed. However, finding a new job takes time, especially when the public employment service is poorly equipped to cope with the permanent inflow of job seekers. Thus, the intensive use of fixed-term contracts tends to inflate unemployment figures. Fixed-term contracts moreover only act as stepping stones towards permanent contracts for qualified workers (Junod, 2006). This causes related problems. For example, workers on fixed-term contracts encounter difficulties finding accommodation or to obtain a mortgage since workers with permanent contracts are preferred.
The French labor market is thus characterized by a high minimum wage and strong segmentation. This hampers school-to-work transitions, particularly for low-qualified youths. While labor market segmentation has also been increasing in Germany, effects on youths are not as detrimental. This can be attributed to labor costs, but to a large extent also to the dual apprenticeship system absorbing many youths during a critical stage of their career.
Activation measures and labor policies
Many countries have compulsory and specific systems requiring the public employment service to encourage low-qualified young job seekers to resume their studies, apprenticeships or training courses.10 No such system currently exists in France. The support of young people between the ages of 16 and 25 who experience difficulties in finding a job is entrusted to “local missions,” which are local counseling and placement offices managed by associations. In 2011 these local missions welcomed 1.35 million young people, of whom almost 500,000 were seen for the first time. However, their support is far from intensive. In 2008 only 11 percent of the low-qualified youths had at least one interview per month, and 50 percent had only three interviews in 12 months (DARES, 2010). This is a very unsatisfactory way to build a trusting relationship between the unemployed and local missions. Moreover, almost 40 percent of the young job seekers wait more than one year before going to a local mission; and more than 60 percent who have crossed this threshold are still searching for a job or training position six months later. Organizational structures also appear suboptimal as the local missions are mainly autonomous and in a de facto monopolistic situation (Cahuc et al., 2013). Hence, current structures and methods in France dedicated to support young people in difficulty are insufficient.
In general, there are various measures of active labor market policy available that aim to enhance the employment prospects of unemployed youths, but their effectiveness (or performance) is relatively unclear. This is not the case for Germany, where an evaluation study of ALMP draws a rather positive picture (Caliendo et al., 2011). In particular wage subsidies, job search assistance and short- and medium-term training programs yield persistent and stable employment effects for participants. However, public sector job creation schemes are found to be harmful for participants; this finding aligns with international evidence (Card et al., 2010). Caliendo et al. (2011) additionally note that for low-qualified youths, an approach which focuses more strongly on the intermediate objective of participation in further education or training should be considered.
France is furthermore an exception amongst European countries by restricting its minimum income scheme to people who are 25 years and older. Almost everywhere in Europe, young people have access to a minimum income scheme before turning 25 years old.11 In France, the consideration of permitting young people under 25 to enter the minimum income scheme has been hindered by the fear of a resulting rise in inactive youths. The consequence is that currently half of the poorest 20 percent of the French population are between 15 and 29 years old (Cahuc et al., 2013). Bargain and Doorley (2013) estimate that with a new system combining transfers to both workless and working poor, the extension of the minimum income to youths under 25 does not create significant disincentive effects.12
Disincentive effects are, in particular, unlikely to result if the minimum income scheme is used as a means of activation (i.e., providing income support while at the same time requiring active search efforts or participation in training programs). The examples of Germany and other countries show that minimum income schemes cannot only be used to facilitate the autonomy of young people, but also as a means of activation.13