French Labor Law Reform Not Supported By Economic Evidence - CEPR

[Leigh Meyers <leighcmeyers@xxxxxxxxx>]

French Labor Law Reform Not Supported By Economic Evidence

By Mark Weisbrot
http://www.cepr.net/columns/weisbrot/2006_03_29.htm

This column was distributed to newspapers by Knight-Ridder/Tribune 
Information Services. It was published in the Sacramento Bee and other 
newspapers.


More than a million people in France have taken to the streets against 
their conservative governmentâs attempts to change the countryâs labor 
law. Here in the United States, these strikes and protests are generally 
seen as another example of Franceâs inability to come to grips with the 
reality of âthe global economy.â

According to the conventional wisdom here, âOld Europeâ is in need of 
serious economic reform. But will the reforms currently on the European 
political agenda actually help most Europeans?

One of the recommended reforms is more âlabor market flexibility.â This 
is an economistâs way of saying it should be easier to fire employees 
and there should be less generous public pensions and unemployment 
compensation, and lower payroll taxes. Lower wages and benefits attached 
to employment, as well as a reduced influence of unions also fall into 
this category.

The French government has proposed to allow employers to fire employees 
under 26 years of age without having to show cause. To Americans this 
may seem strange, since employers under U.S. law are generally permitted 
to fire anyone without having to give a reason. But this is not the case 
in most other high-income countries, and even in many developing countries.

The government claims that employers will hire more people if it is 
easier to get rid of them, and that therefore unemployment (especially 
among younger workers) will be reduced. But the available economic 
research provides little or no evidence for this argument.*

For example, there is no relationship between the amount of employment 
protection in different countries and their unemployment rate. This is 
true generally for measures often portrayed as having a negative impact 
on employment: for example, unemployment compensation, national 
collective bargaining, or the percentage of union members. While it is 
true that Franceâs unemployment rate is relatively high (9.2 percent), 
there are a number of countries with high levels of labor market 
protections and low levels of unemployment: Austria (5.2 percent), 
Denmark (4.4 percent), Ireland (4.3 percent), the Netherlands (4.6 
percent), and Norway (4.5 percent).

This makes sense if we think about it in economic terms. First, it is 
not as though employers canât fire people in France or elsewhere in 
Europe â they just have to show cause. They may prefer the American 
system, but if there are profitable opportunities for expansion, they 
will hire more workers. A countryâs level of employment (and 
unemployment) generally has much more to do with the overall demand for 
the goods and services that its businesses produce, rather than the 
rules or benefits that affect individual employers.

Why then is Europeâs unemployment currently higher (8.4 percent for the 
high-income countries of Europe) than that of the United States (4.8 
percent)? One possibility is that the European Central Bank (ECB) has 
kept interest rates higher than it should have in recent years. As the 
U.S. economy slowed in 2001, the Federal Reserve lowered interest rates 
aggressively (to one percent in 2003) and kept them low for three years 
into our current economic expansion. The ECB was slower to cut interest 
rates and has been raising them this year, despite relatively sluggish 
growth and inflation of only 2.3 percent.

The idea that labor protections are the cause of European unemployment 
is part of an overall myth that Europeans would benefit from a more 
American-style economy. The U.S. economy is said to be more competitive, 
yet we are running a record trade deficit of more than 6 percent of GDP, 
and the European Union is running a trade surplus. The U.S. economy is 
supposedly more dynamic, but French productivity is actually higher than 
ours. Their public pensions, free tuition at universities, longer 
vacations (4-5 weeks as compared with 2 weeks here), state-sponsored day 
care, and other benefits are said to be unaffordable in a âglobal 
economy.â But since these were affordable in years past, there is no 
economic logic that would make them less so today, with productivity 
having grown â no matter what happens in India or China.

French students and workers seem to have a better understanding of these 
economic issues than their political leaders. Hopefully, the wisdom of 
the crowd will prevail.

*See âUnemployment and Labor Market Institutionsâ
http://www.democracyinaction.org/dia/track.jsp?key=101482655&url_num=3&url=http://www.newschool.edu/cepa/papers/archive/cepa200404.pdf
by Dean Baker, Andrew Glyn, David Howell, and John Schmitt. (2004).
Center for Economic Policy Analysis.

Mark Weisbrot is Co-Director of the Center for Economic and Policy 
Research, in Washington, DC