French Fried Attempt at Labor Reform

One seldom encounters a movement so asinine and misguided as the recent protests in France. Over the last two weeks, somewhere between 500,000 to 1.6 million (depending on the source) students, union members, and rioters-at-large took to the streets of Paris and other cities throughout France to protest a proposed change to the laws governing labor contracts. Protests and sit-ins led to the closing of the Sorbonne, the halting of several routes of public transportation, and a few car burnings and melees. As impassioned as these idealistic responses are, they flagrantly miss the pragmatic intent of the reforms.

Employment contracts in France are currently governed by labor laws designed with the protection of employees in mind. As such, employers are constrained by guidelines that dictate when and under what conditions an employee may be terminated. Specifically, termination must be preceded by advance notification and formal justification, and be accompanied by severance pay that would be considered downright extravagant by American standards. At the same time, France has one of the highest unemployment rates in Europe at roughly 10% nationwide and over 20% for those under the age of twenty-six.

With a view toward reducing unemployment, French prime minister Dominique de Villepin has proposed a new set of labor guidelines governing the younger segment of the population. Villepin’s proposal would overhaul the existing law and allow those under the age of twenty-six to be fired from their job within the first two years of employ without formal justification and with shorter notice and reduced severance. The goal is that giving firms more autonomy over their termination policy will induce them to offer more jobs in the first place.

It is not hard to see why a French firm operating under the existing regime would hire fewer workers than a comparable American firm operating under a more flexible arrangement.* The French firm will face higher production costs as they must continue to employ someone they might otherwise have fired and by having to pay an exorbitant severance package once the firing takes place. Since the cost the employer incurs is in the number of employees and not in the number of hours worked, the French firm will carry fewer employees and work them longer hours than the American firm for a given level of output. At the same time, higher production costs translate to lower output levels as consumers demand less of the firm’s product at a higher price. Lower output requires fewer inputs, labor included.

To the extent that restrictive employment rules are to blame for the high rate of unemployment in France, easing employment rules should serve to increase hiring by firms and reduce unemployment among those covered. Of course workers under the age of twenty-six will face a more uncertain tenure, but it is not clear this is such a bad thing. If they get fired, they are back where they started, unemployed in a country with generous social insurance. This win-no-lose (as opposed to a win-win) situation cannot be considered to be any worse than the status-quo. And to the extent that someone might perceive such an environment to be worse, one always has the option of turning down any job offer.

With the economic analysis so unambiguously in favor of the new law, it is puzzling that the opposition to it has been so fervent. Of the three major parties participating in the protests--students, union members, and rioters-at-large--only the unions have something to lose when the current guidelines are relaxed. While unionized jobs are secure in the short term, firms may eventually prefer to hire younger workers subject to more flexible employment terms. Plus, unions characteristically oppose any change in employment terms decided outside of collective bargaining. With this in mind, it is likely that union leaders planted the seed of injustice in the minds of students whose festival-spirited protests attracted the more violent rioters-at-large.

The irony is, French students have little vested interest in the issue. Many university students in France will not enter the job market before the age of twenty-six. When they do, they are likely to take employment in a position with an expected tenure well in advance of two years. The new guidelines are intended to help the low-skilled suburban youth who, feeling excluded from the benefits of French citizenship, are exceedingly prone to becoming the heretofore-called “rioters-at-large.”

* I am indebted to Bob Smith for this argument.

The Ethics of Incentives

Picture this: It’s a snowy December night and your flight into Syracuse just arrived over an hour late. The last shuttle to Ithaca has left and the next one won’t be along until morning. Spending the night in Syracuse is not an option due to an early morning meeting. Rather than shell out $140 for a cab ride, you call your friend Karen to ask if she can pick you up. She agrees and you offer to return the favor by taking her to dinner later in the week. You figure a dinner plus a few dollars for gas should make the trip worth her while and still cost you less than a $140 cab fare.

It’s late when Karen finally makes it to the airport. She’s groggy. To stay alert on the ride back, she cranks up a mix tape of 80s hits. The two of you rock out until the blare of a police siren jolts you back to reality. Cruising down the hill a quarter of a mile back, Karen had unwittingly exceeded the speed limit by 15 mph and is now being issued a ticket for $200. You feel terrible. After all, Karen came all this way for you; she shouldn’t pay $200 on top of it. Then again, it wasn’t your lead foot that aroused the attention of the state trooper. What to do? Should you help pay for Karen’s speeding ticket or not?

Like an episode of Dragnet, the story I have just described in true; the names have been changed to protect the innocent. The innocent are actually two friends of mine and I don’t want either of them mad at me. But the situation does bring to light an interesting dilemma; one I feel especially qualified to address. I should also mention that the involved parties did resolve the issue amicably and without dispute. So this essay is not a critique of their behavior, but merely a theoretical exercise to demonstrate what I would have done had I been in the shoes of Pamela, the passenger.

To determine who should pay the ticket, the criteria you want to account for are compensation and incentives. Karen is your friend first and foremost. And although she picked you up out of the kindness of her heart, failing to adequately compensate her could lead to ill-will. At the same time, compensating her for her speeding ticket rewards bad behavior. But was it bad behavior that led to her speeding? It was after all late--past her normal bedtime--and she likely lost focus on the speedometer due to fatigue and the distraction of the music. In her situation, you may have done the same.

The thing to recognize is, there is a proper level of care in driving such that even a driver exercising proper care may still get pulled over with some small probability. The proper level of care balances the desire to minimize the probability of getting pulled over against the desire to get home as fast as possible. If we think of care simply in terms of speed (or lack thereof), driving too slow satisfies the former desire at the expense of the latter, while driving too fast satisfies the latter at the expense of the former. The point being, you have no way of knowing whether or not Karen was exercising proper care simply by the fact that she was pulled over. All you can hope to do is provide the incentive for her to take proper care and leave the driving to her.

The compensation criteria is straightforward enough but it becomes tricky when coupled with incentives. To see this, suppose you decide to split the cost of the ticket and pay her $100. Actually, with the ticket already issued it’s too late to affect Karen’s incentives. Instead, suppose you made a deal with her ahead of time telling her that you will pay half of all tickets incurred on the trip. Under this deal, Karen is compensated for half of the penal expense of the trip. However, since she internalizes only half the cost, Karen’s incentive to exercise proper care is reduced. In this way, a tension exists between compensation and incentives. The greater is the share of the ticket you pay, the weaker is Karen’s incentive to drive the speed you would have her choose and the greater is the likelihood that you will pay out.

It should be clear that any agreement in which you give Karen more when she gets a ticket than when she doesn’t creates a perverse incentive for her to drive too fast. The solution then is to offer a fixed payment (which could involve non-pecuniary forms of compensation) independent of whether or not she gets a ticket. This way, if Karen gets a ticket and can’t expect another dime from you, she bears the full brunt of her actions. When this happens, she will take what she deems to be the proper level of care in driving.

With incentives accounted for, the payment must be large enough to compensate Karen for her time and for gas, but also for the probability and subsequent penalty of being ticketed while exercising proper care. If a dinner out and a few dollars in gas are enough cover these costs, you can feel content knowing you have done your part. If not, think about substituting something more valued like opera tickets in place of the dinner. But if the cost of fully compensating Karen exceeds $140, I would advise you to take the cab.

Lest you think this incentive-based approach too calculating to be used with those we care for, think about parenting. Parenting is rife with tradeoffs between indulging your child’s wishes and teaching them to be a good person. In “Life’s Little Instruction Book,” (Rutledge Hill Press, 1991) instruction number 88 reads, “Even if you’re financially well-to-do, have your children pay for all their automobile insurance.” Why should a child pay for her own auto insurance? Paying for auto insurance forces the child to internalize the cost of reckless driving, thus providing an additional incentive to drive carefully. The well-to-do parents are then better served to spend their money on a good car, loaded to the gills in safety features.