France's disappointing labor reforms

France's disappointing labor reforms

February 05, 2013
Originally published in The Christian Science Monitor

Businesses in France have long faced a hostile environment at home, with the country’s rigid labor laws among their chief complaints. This matters, as France is Europe’s second largest economy, and its economic stability is crucial to the integrity of the euro. So it may have seemed like progress last month when France’s Socialist president, François Hollande, forged a labor reform pact between his government, a majority of France’s trade unions, and the employers’ organization. Yet it can hardly be considered a success.

Instead of introducing needed flexibility into France’s rigid labor market, the agreement merely tinkers around the edges. Moreover, labor laws aren’t the only reason why France trudged through 2012 with zero percent growth. French economic policy operates under a destructively myopic view on business that underlies France’s economic stagnation.

To its credit, the labor agreement, which will likely go to parliament for approval in the spring, eases restrictions on pay cuts, working hours, and layoff procedures. These are the kinds of measures that can help spur job creation in France and other regulation-bound countries in Europe by encouraging labor flexibility.

But here’s the catch. These reforms only increase flexibility during economic downturns, and they do nothing to change the employer’s fundamental and burdensome obligations to employees.

First, firms still cannot lay off workers to improve competitiveness when the business is healthy; they can only make economic dismissals to preserve competitiveness when already in financial straits. In France, it ought to be legal to fix small problems before they become big.

Second, businesses remain obligated to assist laid-off employees in finding other jobs and in retraining them for their new positions – a distinctly French phenomenon. For businesses with more than 1,000 employees, this limbo period before dismissal can last from four to nine months.

Third, reform merely reduces the period for laid-off employees to legally challenge their dismissal from five years to two. Some progress! Not only does 1 in every 4 French employees bring a case to court, but French labor courts are the least business-friendly in Europe, with employers losing 75 percent of cases, according to the Organisation for Economic Co-operation and Development.

The agreement also increases taxes and fees for hiring workers on temporary contracts. This hits businesses hard because 8 of every 10 new hires are on these contracts, according to French Labor Ministry estimates. This was a union demand to discourage the use of temporary work, which is a competitive threat to union-protected permanent contracts.

The reforms especially harm French youth, as more than half of those employed now jump from job to job under temporary contracts, according to Eurostat. Understandably, businesses don’t want to take the risk of hiring an employee they can’t dismiss later.

Tellingly, Italy tried France’s approach last spring, modestly loosening layoff restrictions while increasing the cost of temporary work. Yet Italian businesses still aren’t hiring, and Italian youth are still trapped in a two-tier labor market of protected unionized jobs and unstable temporary ones.

Just as Italy needs to abolish many of its burdensome labor rules instead of just tinkering with them, so does France. But is this possible, given the French government’s adversarial attitude toward business?

The French tax code discourages workers at the top and the bottom from working and innovating. Last year, the parliament approved President Hollande’s 75-percent marginal tax rate on high-income earners. Thankfully, France’s Constitutional Council struck it down as “confiscatory.” But Hollande’s government is still trying to soak the rich by pushing a revised proposal to increase taxes. Further, high taxes squeeze low-wage earners, too, as France boasts the second highest tax wedge – the difference between gross and take-home earnings – in Europe, according to Eurostat.

Threats of confiscation have even extended to physical property. Last November, the government threatened to nationalize the idled ArcelorMittal steel plant in Florange unless the firm either reopened the facility or sold it to someone who would. Arnaud Montebourg, the French minister for productive development and a self-described “deglobalization” advocate, accused ArcelorMittal in highly inflammatory comments of “violence” and “brutality,” while telling the firm to leave the country and proclaiming, “they are going to have to pay.”

Never mind that European steel demand plummeted by nearly 30 percent in the last five years and that the high cost of French labor made it unaffordable to keep the facility running at full capacity. The company agreed to a rather extortionate settlement that involved no layoffs and the company investing $246 million in the plant.

With threats of confiscatory taxation, nationalization, and an economic ministry on a warpath against business, is it any wonder that around 5,000 entrepreneurs, business executives, and business owners have left France since Socialist President Hollande’s election last May? That’s about three times more than the number that left the country in 2011, according to estimates by Dr. Sylvain Charat of Grove City College in Pennsylvania.

France’s entrepreneur exodus and continued economic malaise signal the need for a labor overhaul, not a minor adjustment. Yet Hollande’s business-unfriendly record thus far indicates that this alarm is falling on deaf ears. More important, France needs to adopt a new view of business, not as a mechanical tool simply meant to create jobs and pay taxes, but as the principal source of wealth, productivity, and human innovation.