France must protect workers, not jobs

November 30, 2017 Labour

France’s labor market is under pressure from multiple forces, including the accelerating destruction of jobs and fragile public finances. The country’s labor system is inefficient and possibly unsustainable. To remedy this, President Emmanuel Macron urgently needs to upend the status quo to protect workers, rather than jobs.

Workers are not responsible for and have no control over the technological changes or demand shocks their employers face; they must therefore be insured against the risk that their jobs might become obsolete or simply unprofitable. At the same time, firms need flexibility to cope with these supply and demand shocks. Without this, they will be reluctant to create jobs in the first place.
Labor market regulations must reconcile these two objectives. The system that Macron inherited in France does a poor job of meeting these challenges, displaying chronically high unemployment, especially long-term unemployment. Overprotected, “in-for-life” contracts and poor worker mobility deprive firms of flexibility and proper allocation of workers to jobs. And while the system protects the jobs of those lucky enough to have a permanent contract, it excludes many others — notably young workers and workers older than 50 — from stable jobs, pushing them into periods of unemployment, unsatisfactory short-term jobs or early retirement.

In his drastic, although somewhat fragmentary attempted upheaval of the French labor market, Macron’s first reform was to raise the legal minimum amount for severance payments for wrongful dismissals by 25 percent, while curbing the ability of courts to force employers to pay higher severance payments. This is a step in the right direction, as the problem is not the legal minimum for severance payments but the protracted court process that follows many dismissals, which often takes several years and eventually yields a random outcome. Macron’s reform also gives firms more power to negotiate hours and eases the bureaucratic burden for both multinationals and small businesses.

The government is expected to soon launch the second leg of reforms, focusing on unemployment insurance. Currently, the cost of unemployment benefits does not fall on the companies that actually do the firing. Instead, it falls on those that keep their employees and thus make contributions to the social security fund. This is upside down. Macron’s reform would ensure that contributions paid by a given firm to the national unemployment insurance fund are in line with unemployment benefits paid to workers recently laid off by the firm. This is a sensible move that will make firms responsible for their actions.

Increasing accountability for the social cost of a firm’s decisions would also eliminate the frequent scam in France wherein voluntary departures are covered up as dismissals by mutual agreement between firms and workers, enabling workers to enjoy time off or early retirement at the expense of the social security system, which pays out the unemployment benefits of the laid off workers without penalizing the employer.
There are other dysfunctional features of the labor market that the French government will have to tackle, including labor code complexity, threshold effects (many firms don’t want to grow beyond 50 employees in order to avoid heavy extra obligations), and dominance of industry-level agreements over firm-level agreements. The education, apprenticeship and continuous training trilogy will also be key. International rankings show a very uneven French educational system, with superb education for the top 20 percent and a mediocre offering for the remaining 80 percent. France’s apprenticeship program is only about a third the size of Germany’s. And professional training costs France nearly $38 billion per year, with poor outcomes.

Will Macron’s reforms, if carried through, solve unemployment? It’s hard to predict precisely, as increased flexibility will both facilitate dismissals and boost job creation, but there is no reason why France cannot reduce the gap with low-unemployment countries. But policies should also be assessed in the light of other, broader criteria: quality of jobs, competitiveness and public finances. Precarious jobs are unsatisfactory ones. Permanent jobs lead to low labor mobility and to conflicting relationships between management and workers. And the current system imposes a heavy burden on public finances.

The increase in inequality observed in the last 30 years is a serious threat to France’s social contract. Inequality may well increase further with coming technological developments, making it even more urgent to find solutions. Many observers of the French labor market fear that reforms will increase inequality. Yet the current system is already terribly unequal: low-skilled, young and over-50 workers often face hard times and lose their dignity.
In the absence of reform, the percentage of job creations via short-term contracts is likely to increase, as no firm will want to create permanent jobs in an era of rapid job obsolescence associated with artificial intelligence and mechanization. Upward mobility has stalled. And the protection of workers will be jeopardized if the heavy public expenditure around the labor market proves to be unsustainable.

Addressing the inequality problem requires a cluster of reforms that will give everyone a shot at a decent job. France’s government must do a better job protecting those who lose out because of technological advancements, design a more efficient domestic and international tax system, and create a better-focused education and continuous training system. There is no silver bullet, but inequality won’t be solved by adhering to the status quo and the quick fixes of the past.

 

Article published in the WashingtonPost

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