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.
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.
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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.