Monday, June 19, 2017

A French Case Study on How Rigid Employment Protection Laws and Unionism Stifle Labor Market Growth

Emmanuel Macron was elected President of France last month, and already I knew that his work was cut out for him. Between economic stagnation, immigration, unemployment, defense, and a host of issues, Macron will not be bored during his tenure. Another issue that Macron is already facing is trade unions. During the French election, Macron made labor market reform a key proponent of his pro-business election platform. Macron was not sworn into office all that long ago, and the trade unions are ready to face Macron because of his pursuit of labor regulation reform. Macron is already being urged by trade unions to slow down labor market reforms. Macron sees labor market reform as an opportunity to bring more flexibility to a byzantine set of labor laws (le Code du Travail), while there are those on the Left who view its as protecting Big Business while giving workers the shaft. When analyzing the dynamics of labor market regulations in France, we should ask ourselves what sort of effects the regulations have and whether it is worthwhile keeping such rigidity.

Le Code du Travail, which is France's 2,000-plus page corpus of labor laws, has been around since the late nineteenth century. With that many pages of rules and regulations, it is not practical to cover everything today. However, there are some key points about the French labor market that can be covered that can nevertheless paint the picture of the state of France's labor market. For one, the Index of Economic Freedom (see here) points out how France's labor regulations lower its economic freedom. The Fraser Institute has similar results with its economic freedom index. Although France's scores on Fraser's index are higher than they used to be, France's score on regulations (and labor regulations in particular) lower its overall score on Fraser's index.

There are a number of labor laws that constrict labor market growth: mandated vacation time, the 35-hour work week, a high minimum wage, the list goes on. A major example that illustrates the ineptitude of the French labor market is what happens when a firm hires fifty employees. Once an employer exceeds 49 employees, businesses are hit with many regulations, including having to create a work council (comité d'enterprise), establish a Health and Safety committee, reporting more detailed statistics to the Labor Ministry, appoint a union representative, and new regulations making it more difficult to lay off or fire workers. A 2016 paper from The London School of Economics (Garicano et al., 2016) shows how French companies get around all the rules applying to companies with 50 or more employees: hire up to 49 employees. This is significant since the same LSE paper (see below) found that larger factories in France have had higher productivity rates than the smaller ones (Garciano et al., p. 33). Another way of framing this quandary is that France is not being as productive because of the labor rigidity.

What ends up being paradoxical is that labor productivity in France is nearly as high as it is in the United States (see below), not to mention that France has one of the highest GDPs in the world and has a good standard of living. If you notice the metric the OECD uses for labor productivity, it is GDP per hour worked. That means the metric filters out anyone who is not working. Sure, for those who are working, they're doing great. But what about the rest who are not?

As this Cato Institute article points out, just because France does have a relatively high standard of living doesn't mean that France's economy is doing well. One of the drawbacks of the French labor regulations is that France has a higher-than-average unemployment (see below). As the OECD Index of Employer Protection, it is more difficult to fire someone in France than it is in the United States. If France were able to hire more people, it might be that the labor productivity per employee drops a bit. But at least more French people would be working, and that overall economic output increases. The Left-leaning International Labor Organization is hardly capitalist, but nevertheless concedes that short-term jobs are a feature of stringent employment projections (Le Barbanchon and Malherbert, 2013, p. 20). Furthermore, a paper by three French economists shows that any country with high employment protections would benefit from lowering those protections by increasing [low-skilled] employment (Cette et al., 2016).

What would it look like if France relaxed its labor laws and employee protections? A panel of some of the foremost expert economists in Europe were asked last month about whether liberalizing France's labor markets by reducing employment protections and decentralizing union power would improve the French economy. Two thirds answered that it would improve France's economy. About the same percent also agreed that reducing employment protections would translate into reduced unemployment. Most of those who did not agree were unsure. Why? They thought that the short-term might be problematic because overmanned firms might go to the wayside. That being said, when you remove the economists who were unsure, the ratio between those who thought it would help versus those who didn't was even more pronounced. Most economists agree that France's labor laws are too stringent, and that France would benefit from a more liberalized labor market.

France provides a good example of what happens when labor regulations run amok. Even so, one can argue that France is just one country, one case study. After all, comparative politics reminds us that each country has its own unique set of circumstance, and that multiple phenomena simultaneously interact to create different results. On the other hand, the basics of comparative politics gives us the ability of analyzing cross-country data and phenomenon while reminding us that each country has its own unique dynamics. Even if France's dynamics are not identical to those of the United States or other countries, we can still draw some conclusions.

When regulations make more it difficult for businesses to hire, fire, and retain employees, it is more difficult for economic progress to take place. It is more difficult for people to have a livelihood. Minimum wage causes greater unemployment. As we experience in the United States, extending overtime laws makes hiring more expensive. An IMF paper shows how German employment improved when Germany significantly reduced labor regulations in the 2000s (Detragiache et al., 2015). We can go through country by country, but both economic theory and empirical evidence point to the same thing: more liberalization of the labor market is better. The unions in France will surely push back, but when all is said and done, France will benefit from less labor market rigidity.

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