French Labor Law Reform Not Supported By Economic Evidence

by Mark Weisbrot

This article was published in the following news outlets: 

Sacramento Bee - March 31, 2006
The State News (MI) - March 31, 2006
Charleston Gazette (WV) - April 2, 2006
Akron Beacon Journal (OH) - April 2, 2006
Pittsburgh Tribune-Review (PA) - April 8, 2006

More than a million people in France have taken to the streets against their conservative government’s attempts to change the country’s labor law. Here in the United States, these strikes and protests are generally seen as another example of France’s inability to come to grips with the reality of “the global economy.”

According to the conventional wisdom here, “Old Europe” 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 “labor market flexibility.” This is an economist’s 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 France’s 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 can’t fire people in France or elsewhere in Europe – 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 country’s 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 Europe’s 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 “global economy.” But since these were affordable in years past, there is no economic logic that would make them less so today, with productivity having grown – 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 “Unemployment and Labor Market Institutions” 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.