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Monday, March 27, 2006

French Labour Market Reforms

The French labour market is, of course, once more in the news. Emmanuel (Ceteris Paribus, in French) has a timely post on A Fistful of Euros. Danish blogger Claus Vistesen had a thoughtful post about the situation last week, pointing to the relevance of some of the comments being made by Bloomberg columnist Mathew Lynn. Today another Bloomberg columnist - Caroline Baum - also talks a lot of sense:

Is it possible these fortunate, educated young men and women can't see where the road ends? If my French weren't so rusty, I'd sit down with one of the students and ask her a few questions. I can only fantasize about the response.

CB: Are you aware that you are objecting to a law that would actually improve your chances of finding a job when you graduate?

French Student: Mais non. We have a social contract with the government that protects us from the dehumanizing experience of being discarded. We are happy to have guaranteed benefits -- education, health care, a good pension -- and enjoy our life without worrying about the future.

Natural Rights

CB: You want all the benefits, but what about the cost? Creating disincentives for the private sector to hire increases the burden on the public sector, which is already the third largest in the industrialized world. Last year, total French government spending was 53 percent of GDP, according to the Organization for Economic Cooperation and Development. With French unemployment at 9.6 percent, youth unemployment running at more than 22 percent and 40 percent among certain minorities -- remember the riots last fall? -- the government should be making it easier for private companies to hire and fire.

FS: But a job is a right!

CB: It is? It's not among the rights delineated by the Founding Fathers of our arguably young nation: those of life, liberty and the pursuit of happiness. These rights are unalienable: They are not the government's to give or to take away.

How do we know whether something is a right or not? If the exercise of my right puts a burden on you -- my right to a job forces you to hire me -- by definition it can't be a right. Everyone can exercise his or her rights simultaneously without imposing a burden on someone else.

I think Baum gets to the core of the issue, job creation at the expense of the public purse is no longer a serious policy option in France, at least not if they want to maintain some semblance of their welfare and pensions system it isn't. This was the point of the recent Pebereau report which I posted about here. France now has to make a sustained long term effort to reduce the growing dependence on indebtedness to finance current needs. This can only be done by increasing the share of GDP created in the private sector, which means France needs to put a bigger share of its population to work.

Morgan Stanley economist Eric Chaney makes offers some very to the point arguments about insiders and outsiders here. An unusually contrarian view from Wolfgang Munchau in the Financial times is unfortunately behind the firewall:

The students are winning the political battle against Dominique de Villepin, the French prime minister, over his labour contract for young people, known as CPE. At first sight, the travails of Mr de Villepin fit a depressing pattern of Europe's chronic inability to reform. The prime minister is portrayed in the media as an idealistic political leader who tried to do the right thing, but failed. In the same vein, the young protesters on the streets of Paris look as though they stand in the way of France's transition to the 21st century.

This narrative is as widespread as it is false. As far as I know there exists no reputable academic foundation for Mr de Villepin's specific proposal – a work contract that removes employment protection for the young, while leaving it fully in place for the old. There is some consensus in the labour market literature that excessive employment protection can lead to high unemployment among certain groups, including the young. But this consensus does not imply the selective removal of employment protection for a single age group. I would suspect that most labour market economists would be on the side of the students in this conflict.

I don't really see where Munchau wants to go with this argument. He is certainly right that there is little theoretical justification for leaving employment protection fully in place for older workers, both issues need to be addressed, but this hardly seems to be a justification for not takling one of the problems, which, as we can see, is a difficult enough issue in and of itself.

Cheney in fact offers some explanation of and backing for the Munchau view, in the sense that piecemeal reform may prove impossible without addressing the bigger issue of insider contracts. But are they right? Today's protesting students will be tomorrow's protected insiders. Is there any real reason to expect that they would be more favourable to a change which instead of offering them a couple of years of possible instability offered them a lifelong reform? Or is there any reason to expect that adding the issue of removing contractual protection for older workers would make the bullet any easier to bite. Is revolution more digestible than reform? I have my doubts.

There is a strange similarity between the kind of coalition which is emerging in opposition to the Kleenex generation issue(and this generation certainly isn't going to be used and then thrown away, in my view, the couple of years of cheap temporary contracts will make them more, not less, valuable) and the opposition to the recent EU constitution proposal. People are opposed for diverse reasons. Maybe some are opposed because they feel a more equitable reform, attacking the whole issue of protected contracts, is what is needed (just like they felt a better EU constitution was required) but the vast majority are more than likely opposed to any such flexibilisation agenda in and of itself.

Of course, Munchau and Cheney may well be right at the 'real politik' level: maybe this proposal will go the way of the former Balladur one (some 13 years ago) and then maybe push will come to shove and a more complete and more radical change will be introduced after the Presidential elections in 2007, but don't expect this to be an easy ride for anyone, whatever the outcome of that vote.