Essec Business School

On March 30, a group of 15 professors and researchers in economics published a joint comment column in Les Echos, urging the French Government to undertake an ambitious reform of the labor market. As a key measure, the proposed reform would relax the judicial control over the economic firing motives. At the same time, it would introduce a bonus/malus system for the employer contributions to the unemployment benefit, reform and strengthen vocational training, and narrow fiscal aids to employment around the minimum wage.

ESSEC Knowledge: Who are the economists signing this proposal in Les Echos?

Radu Vranceanu: All of them are academics, recognized scholars in their field, working in higher education and research institutes, with no personal interest whatsoever. No need to introduce Jean Tirole, who has been a strong advocate of these reforms for many years.

EK: Why advocating for increased flexibility? Why now?

Twenty years ago, in 1994, the OECD pointed out in its Job Report that labor markets in Continental Europe suffer from excessive employment protection legislation and argued that only a more flexible labor market can both help reduce unemployment and provide firms with the adjustment capabilities needed to successfully compete in international markets. Countries such as Denmark, the Netherlands, Austria, and to some extent Germany, opted for a light employment protection legislation where firms can fire easily for economic motives, but at the same time will hire more eagerly in good times. Of course, nobody speaks here about discriminatory firing, which is severely sanctioned in all of the Western countries. The idea was to protect individuals’ income through relatively generous unemployment insurance, but no to protect jobs.

In Southern Europe (Spain, Greece, Italy, France, Portugal), the requirement of flexibility prompted governments in the late 90s to make firing of workers under “regular contracts” even more difficult, while at the same time they supported the emergence of a large set of workers under “temporary contracts”, on which all adjustments will fall. Over the years, the unemployment performance of the first group of countries turned out to be much better than of the second one. In particular, the Great Recession (2007-2009) revealed all the strengths of the first system, and the dramatic flaws of the second one, which was poisoned by long-term unemployment, youth unemployment and excessive unit labor costs. Hence in the aftermath of the Great Recession all Southern European countries but France decided to remove or reduce the differences between regular and temporary work contracts, as they reduced drastically the legal barriers on firing of the workers under “regular, open-ended” contracts. This reform has not only a strong theoretical justification, but its benefits can already be observed in those countries that adopted it.

EK: Can we expect any positive spillover effect form this reform of the labor market to the global economic situation?

First and foremost, the reform would increase the demand for labor by firms, and would stimulate employment. The positive effect should be the strongest for low-skilled jobs, where the current contractual rigidity prompts firms to use alternative solutions to hiring, such as automatisation and off-shoring production.

Another positive effect would be the increased ability of the economies to adapt their productive structure when hit by various shocks in terms of technology, tastes or terms of trade, with a more dynamic labor adjustment process. Of course, a higher flexibility in adjusting staff should be simultaneously implemented with additional generosity of the unemployment benefits and increased effectiveness of vocational training.

Finally, a flexible labor market should absorb with greater ease macroeconomic shocks of the Great Recession type, by allowing for wage moderation in downturn times and wage rises in good times. Since it is difficult to manipulate the exchange rate, it appeared that in times of recession, wage moderation is the only way for firms to retrieve competitiveness, and ultimately protect employment.

EK: Isn’t this just another proposal by economists living in their Ivory Tower?

Not at all. This type of reform has been advocated for many years by the OECD, the European Commission under the concept of “flexicurity”, and many academic economists who observed the strong labor market performance of countries that have implemented it. What should be emphasized here is that economists are often criticized on the grounds that they do not make any constructive proposal. This call proves the contrary, by providing the right guidance to policymakers on how to modernize a fundamental component of the French economy: its labor market. The economists’ proposal in les Echos has the advantage of being simple, efficient, and in line with the international regulations.

EK: Since you mentioned it, is the proposal consistent with international regulations?

France is one of the ten Western countries to have signed in 1982 the very demanding Convention 158 of International Labor Organization the on “Termination of Employment”. The question of whether this Convention still makes sense in a globalized world, where firms must continuously adapt to new challenges, is open to debate. As more than 10 years after the signature have elapsed, France can withdraw whenever it wants. Even if it does not, today the labor law in France goes well beyond what the convention requires. According to the convention, “the employment of a worker shall not be terminated unless there is a valid reason for such termination connected with the capacity or conduct of the worker or based on the operational requirements of the undertaking, establishment or service.” In France, what is an “operational requirement” became an explicit condition on the firm making losses, something that the convention obviously does not require.