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* Economists say labour reform key to economic revival
* Unions, employers say more talks needed on crucial points
* Hollande pressured from both sides
By Nicholas Vinocur and Yann Le Guernigou
PARIS, Dec 20 (Reuters) - Negotiations on changes to labour laws aimed at boosting France's competitiveness will extend into next year after unions and employers failed to meet a deadline on Thursday, but both sides said progress had been made.
Socialist President Francois Hollande had urged the two sides to reach a "historic" deal by Dec. 31 to fix dysfunctions in the euro zone's second-largest economy: a rigid job market, a complex labour code and fraught labour relations.
"We made advances and we've decided to meet again on the 10th of January," said Joseph Thouvenel, a negotiator for the moderate CFTC union.
A deal is seen as central to a wider drive to shore up the economy, tackling politically explosive social issues that generations of French leaders have avoided because of the threat of union-led street protests.
Underscoring the challenges facing Hollande, predictions released by the INSEE national statistics agency l ate on T hursday showed France's economy will remain c omatose u ntil mid 20 1 3 while the jobless rate wil l creep up to a 15-year high of 10.9 percent. [I D :nL5E8NK9DQ]
INSEE estimated the economy would shrink in the fourth quarter of 2012 and grow by 0.1 percent in the first two quarters of 2013, complicating France's deficit-cutting plans that are based on a higher growth rate.
To avoid a clash with unions, Hollande has steered clear of trying to dismantle the 35-hour work week revered by many on the left. And a government roadmap for the talks made no mention of the term "flexibility" reviled by hardline unions.
Yet the prospect of a deal by his end-of-year deadline crumbled as unions rejected a new set of proposals by employers, saying it did not address their demands for short-term job contracts to be taxed more heavily than long-term ones.
Late on Thursday, union negotiators said the employers needed time to review amendments proposed by the unions.
"Beyond the sticking points, we've made amendments of all the articles that were problematic," said Patrick Pierron, negotiator for France's largest union, the CFDT.
"Now they need to respond to us on these amendments," he said. "That's why they're asking for a delay which means they need more time and they'll come back to us again in January."
Talks are still deadlocked over union demands to make hiring on short-term contracts less attractive for employers by imposing increased taxes or unemployment contributions.
While nearly four in five workers in France are employed on iron-clad permanent contracts, the share of those employed on short-term and temporary contracts is growing as companies turn to such arrangements to lower labour costs.
"This is a precondition for the CFDT (union) - if it's not in the text, there will be no CFDT," said Pierron.
The Medef employer umbrella association has so far rejected the demand, saying small- and medium-sized businesses which tend to use short-term contracts will suffer disproportionately.
Genevieve Roy, negotiator for the CGPME federation of these businesses, reiterated her group's opposition to such taxation.
"It's a delicate balance, and finding that balance takes time," Roy said. "But I have no doubt we'll get there."
Unions are resisting employer calls for more flexible permanent contracts and for lowering legal barriers to firing, notably by capping compensation and cutting the time frame for workers to dispute their dismissal from five years to one.
Some economists say the talks are not ambitious enough, and will fail both to tackle high labour costs dragging on French exports and find the best balance between the inflexibility of permanent job contracts and the insecurity of temporary labour.
If the talks collapse or fail to produce a genuine reform, Hollande has said the government will impose changes through legislation to be introduced in parliament in early 2013.
But sending a draft law to parliament without a deal signed by unions and employers will expose Hollande to criticism from both trade unions and his left-wing allies.
A negotiator for one of the two hardline unions, who asked not to be identified, warned any such draft law would be vehemently opposed by the unions. He hinted they would use all their means, including calling street protests, to defeat it.
"In that case, we will fight it with all our will," he said.