Home' Trinidad and Tobago Guardian : April 30th 2015 Contents BG22 THE ECONOMIST
BUSINESS GUARDIAN www.guardian.co.tt APRIL 2015 • WEEK FIVE
In November 2003 France and Ger-
many teamed up to shatter the euro s
stability-pact rules for budget deficits
that they had agreed to six years
earlier. For three years neither Pres-
ident Jacques Chirac of France nor
Chancellor Gerhard Schröder of Ger-
many respected the deficit cap of
three per cent of GDP. Neither suffered sanc-
However, Germany used its fiscal space to
become more competitive and loosen its labor
market. France, which recently had introduced
the 35-hour work week, mainly made matters
Now, under President François Hollande,
France once more is breaching the deficit rules
and has, yet again, been given more time to
bring its deficit below three per cent. The
unwritten deal is that this time it will make
a proper stab at reform, especially of its labour
France s labour code, a fat red doorstop of
a book, runs to 3,809 pages, 45 per cent longer
than 10 years ago. The collective-bargaining
agreement for hairdressers alone covers 196
"The key challenge," concluded a recent
survey of France by the Organisation for Eco-
nomic Cooperation and Development, a Paris-
based think tank, "is to reform the labor market
to promote job growth."
Is that likely, though?
The contrasting record on jobs across the
Rhine is compelling. In 2001 unemployment
in France and Germany was comparable, at
slightly less than eight per cent. Today it is
less than five per cent in Germany, but more
than 10 per cent in France. Although France
and Germany have similarly high productivity
per hour, the French start work later and stop
earlier. Too many French youngsters leave
school with no qualifications and drift for
years on the fringes. The share of young people
not in education, employment or training is
19 per cent in France, almost twice that in
In 2003 the overall employment rate in the
two countries was similar. Today it is 74 per
cent in Germany but only 64 per cent in
France. Among 55-to-64-year-olds, only 47
per cent of the French toil away, next to 66
per cent of Germans.
Put simply, Schröder, a Social Democrat,
made the political choice to get people into
jobs, even if only part-time and low-paid,
rather than leave them on the dole.
His controversial Agenda 2010 measures,
including the Hartz labor reforms, may even
have cost him the chancellorship in 2005.
They shortened the maximum period for
receiving unemployment benefit, made it hard-
er to refuse job offers and let small firms shed
staff more easily.
Combined with wage-moderation deals
between unions and employers, the outcome
was an injection of flexibility that eased low-
wage, service-sector job creation, lifted
employment and limited job losses during the
2008-2009 financial crisis.
On both the French left and the French
right, by contrast, political leaders implicitly
accepted high unemployment as a price for
giving those with jobs more security and higher
wages. This has created a dual labour market
of insiders and outsiders. Employers are
deterred from creating permanent jobs by the
uncertainty and costs of shedding them if they
have to, so they hire only on short-term con-
tracts, reinforcing precisely the insecurity that
the system of job protection was meant to
avoid. More than 80 per cent of new hires in
France are on contracts of three months or
Under reformist Prime Minister Manuel
Valls and Economy Minister Emmanuel
Macron, Hollande s government has shifted
its stance. There is less talk of subsidised job-
creation or raising the already-high minimum
wage, and more of market incentives. Three
years of near-zero growth and worries that
unemployment may not drop before the 2017
election have concentrated minds.
French employers, Valls has said, are "fright-
ened of hiring" because of labour-market
rigidities. On April 19 Hollande said that he
would make labor courts judge contested layoffs
within six months, versus today s average of
How far is the government ready to go on
labour reform? Unlike Schröder with Agenda
2010, it is doing lots of small things that make
it hard to judge the whole. Mindful of hostility
from unions and its own party rebels, the gov-
ernment has decided not to go for one big,
eye-catching labour-market reform.
"We re doing the opposite to Renzi," one
adviser said, referring to Prime Minister Matteo
Renzi of Italy, who has made a splash with a
single, more flexible short-term contract.
French reforms are parceled out between
Macron, who already is pushing through a law
to liberalise product markets, and Labor Min-
ister François Rebsamen.
Some planned reforms are being left to talks
between employers and unions, even though
only eight per cent of private-sector workers
belong to a union.
The French ragbag includes a bill, unveiled
by Rebsamen on April 22, to simplify work
councils. This will not abolish "threshold
effects," which deter companies from employ-
ing more than 49 staffers, because rules oblig-
ing them to set up separate work councils and
health-and-safety councils kick in at 50. It
should reduce the burden, though, in some
cases by blending the two councils into one.
The bill also will merge two back-to-work
benefits to encourage, if not force, the unem-
ployed to work.
The government plans to loosen rules, passed
in 2013, that allow firms in "serious economic
difficulty" to renegotiate working hours and
pay in return for protecting jobs. Only nine
firms, including Renault, have used this pro-
vision. Unions and employers also will discuss
ways to make it easier for small firms to hire.
They may loosen rules on short-term contracts
or strengthen firm-level bargaining.
They must trim the US$4.3 billion deficit
in the unemployment-insurance fund. This
could mean reducing the maximum period
for which benefit is paid, now three years for
over-55s, or reducing payouts, now capped at
US$6,443 a month. These measures come on
top of a cut in social charges of as much as
eight per cent, taking a slice off France s noto-
riously high tax on employment.
Macron claims that all this adds up to "60
per cent of what Schröder did on the labor
market, and (referring to his product law) more
than the Germans did on liberalising goods-
and-services markets." He does not seem
cowed by the bruising experience of having
to force his law through Parliament by decree
in February, for want of a guaranteed majority.
Indeed, if need be, the government could do
the same again in July. It claims that its reforms
could create between 800,000 and 900,000
extra jobs and add a cumulative four points
to GDP over five years.
It all sounds good, but the twin difficulties
ahead are muddle and politics. In a recent
report comparing France and Germany, Jean
Pisani-Ferry, head of the government s eco-
nomic-planning unit, and German economist
Henrik Enderlein pointed to the shortcomings
of French piecemeal reform.
"Partial reforms often fail to provide enough
clarity to economic agents," they wrote, adding
that "external perception of French priorities
and directions remains blurred at best."
The best guess is that these reforms are
useful steps, but nowhere near as much as
France needs to prompt many more private-
sector, permanent jobs.
"France could perhaps level the playing field
with Spain, or even Italy, but certainly not
with Germany, where liberalisation has gone
through the roof," said Ludovic Subran, the
chief economist at Euler Hermes, a credit
The high level of the minimum wage is seen
as a taboo, even for the young, said Jean Tirole,
a Nobel Prize-winning economist at the
Toulouse School of Economics.
"At some point," Tirole said, "you have to
confront the duality of the labor market and
the excessive role of judges in severance pro-
This may be the best that can be hoped for,
though, given the political constraints. Hollande
campaigned on a promise to squeeze the rich
and the banks, not to curb unemployment
benefits or reduce job protection. Valls, who
in the past has called for such things, took
less than six per cent of the vote when he ran
in the Socialists presidential primary in 2011.
France is never far from another election.
Regional elections now beckon in December,
and after that the pre-presidential season will
begin. The space for taking political risks is
Yet, if many Socialists are skeptical, the
public seems less so. Less than five per cent
of voters support the Communist Party, the
main backer of France s biggest union. After
resorting to his decree, Macron rose in pop-
Hollande may not win friends on the left
by letting his government push labor-market
reform, but he has little chance of seeing a
revived job market before 2017 if it fails.
@2015 The Economist Newspaper Ltd.
Distributed by the New York Times Syn-
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