Who cares about the unemployed?

Who cares about the unemployed?

The French labor market has all the characteristics of the South-European model. In particular, it features a “dual” structure, withabout 90% of total employment hired under so-called “unspecified-duration contracts” or “contract à durée indeterminée”, the rest being hired under various forms of temporary contracts with a restricted use. However, the “unspecified duration” label is misleading: while this term would hint that the contract can be broken at any time, in France this means that the contract cannot be terminated by the employer unless very stringent conditions are fulfilled.

In France a firm can’t just downsize to improve the performance if it already does well. Hence, so called “massive layoffs” – i.e. more than ten employees – must always be approved by the state administration. Only if they agree that the firm is on the brink of bankruptcy will they approve the restructuration. What’s more, any individual fired for “economic reasons” has the right to take his case before a labor judge, and the firm should justify its decision with financial evidence. If the employer is found guilty of “abusive firing”, he could be forced to pay back missed wages or even reinstate the employee. It’s no wonder French firms are thinking twice before hiring new staff and resorting more and more often to automation and off-shoring.

When it took office in 2007, the former right-wing government claimed that the reform of the labor market was one of its top priorities. And yet five years later nothing happened, except a minor change in the labor law, according to which employees and employers could separate on mutual consent without the employee losing its unemployment benefits.

However, in light ofthe Euro area public debt crisis that began in 2010, it became more apparent that many Southern European countries have a major firm competitiveness problem. These firms suffer from ever higher unit labor costs driven by rising wages and low productivity gains, all against the backdrop of their notorious incapacity to adjust their workforce to changes in terms of trade and technology. By the end of 2012, countries hard-hit by the crisis such as Spain and Italy implemented timid labor market reforms including giving firms more flexibility to free themselves from redundant employees. Not surprisingly, the country with a highly flexible labor market – Ireland – managed to overcome their substantial economic difficulties with the highest degree of efficiency.

When it comes to the overall response to the Euro crisis, France appears as a particularly intriguing case: despite the fact that investors are eager to hold French public debt, exports continue to fall and the unemployment rate climbs to over 10% of the labor force. To address these adverse trends, the newly elected left-wing government has reduced corporate taxes and pushed forward a reform of the labor market. They organized in the Fall of 2012 a large national negotiation between the employers’ trade-union and the five main employee trade-unions which resulted in an agreement signed by three of the five unions in mid-January 2013.

This agreement promises to be a good indication of legal reforms to come this Spring: Firms in difficulty are likely to be granted the right to negotiate wage cuts or working hour increases for up to two years, if they commit to maintain employment. Several measures would also aim to simplify the layoff protocol for firms in financial difficulty, by reducing the length of the administrative procedures. Furthermore, workers fired for financial reasons would only have two years rather than five to contest the company’s decision in court. While modest, these changes go in the right direction by giving firms some ability to adapt to shocks.

What’s disappointing is that these reforms would not remove the absurd requirement according to which French companies must justify their financial difficulty before implementing a restructuring decision. In brief, the state would keep its right to interfere with the firms’ “right-to-manage”. Indeed, the simple idea that a profitable company is good for society is something that French unions – and the public at large– just seem to have trouble understanding.

If through these reforms firms get some additional flexibility, workers within the firm or insiders get additional advantages. In particular, they would gain universal access to additional healthcare insurance. Temporary contracts would be more heavily taxed, thus preventing firms from resorting to this alternative form of labor input. By limiting this “internal competition”, the agreement would reduce the downward pressure on insider’s wages. The only minor change toward better income protection for the unemployed is the proposed implementation of a special benefit account, which would allow for a fractioned management of the rights to unemployment benefit.

This points to a striking feature of this deal: In all countries using the flexicurity model (Denmark, the Netherlands, Austria) the greater ease with which a firm can dismiss an employee is counterbalanced by better protection of the unemployed, such as access to a larger unemployment benefits package over a longer period of time. With this new labor agreement, French firms and unions traded the benefit of a slight increase in flexibility for additional benefits for the same privileged insiders! It is a notorious sin of French trade-unions that they do not really care about the unemployed as a group, but focus obsessively on insiders’ interests. This deal is new proof.

Yet as long as the protection of the unemployed does not become an explicit goal of French trade unions, one will not be able to push labor market reforms in the right direction. And as long as the unemployed are not members of the unions, this cannot happen. Another solution would be to recognize that unions are not the government’s best partners in fighting unemployment; in this case, labor market reforms should be carried out without asking for their advice and consent.

Complementary readings :
D. Besancenot & R. Vranceanu, 2009, Multiple equilibria in a firing game with impartial justice, Labour Economics 16 (3), 262-271.
D. Besancenot & R. Vranceanu, 1999, A trade union model with endogenous militancy: interpreting the French case, Labour Economics 6 (3), 355-373. 

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