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France's disappointing labor reforms

Labor reforms forged by France’s Socialist president, François Hollande, may look like progress. But they merely tinker with rigid labor laws. Europe's second largest economy must become far more business friendly if it wants to escape zero-percent economic growth and youth joblessness.

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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.”

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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. 

Matthew Melchiorre is the Warren T. Brookes journalism fellow at the Competitive Enterprise Institute.


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