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.