Can Macron get labour reforms to work?

8th September 2017

It seems only yesterday that Emmanuel Macron swept to power in France’s presidential election, and his political movement, EN MARCHE!, secured a commanding victory in subsequent parliamentary elections. Fears that France would succumb to the Front National’s populism proved groundless. Yet Macron’s latest approval rating stands at just 36 per cent, not dissimilar to that of Donald Trump. And this is before he has done anything really controversial to address the country’s structural economic problems. Last week, though, he began, and announced proposals to reform France’s labour market system, or Code du Travail. These reforms, which have been a long time coming, will soon be tested in the streets with strikes predicted next week, and possibly also in the courts.

If you took an economic snapshot of France, the picture wouldn’t be so bad. The economy grew by 2 per cent at an annual rate in the second quarter, and is on course for growth of about 1.5-1.8 per cent this year and in 2018. Unemployment, now at around 9.5 per cent, is slowly coming down, while profit margins and investment spending are going the other way. France has the opposite of the UK household sector’s addiction to debt: French household savings equate to about 14 per cent of disposable income. And income inequality has been less of a problem in France than elsewhere in advanced economies.

 

Against this though France is weighed down by some acute structural problems. Public debt is almost Italian in size, amounting to about 125 per cent of GDP and President Macron hasn’t begun to address the country’s deadweight levels of public spending and taxation, which amount to about 56 and 53 per cent of GDP, respectively. While these levels are not toxic in and of themselves, France’s economic model has nevertheless failed in important respects, compared, say to Scandinavian countries that also have high levels of public expenditure and tax.

What’s more, over a fifth of under 25s are unemployed. France has lost more middle-skill, middle wage-paying jobs in the last ten years than any other major OECD country. The share of people aged 15-74 in employment is still about 2 per cent lower than before the financial crisis, and the gap between France and the rest of the OECD in this respect has risen steadily. One of the key problems in France is the low employment rate for people aged over 65. There has been a general lack of attention to declining standards in schools, apprenticeship creation, and high quality training with the result that more than 20 per cent of people are believed to lack basic work skills—the third highest among major OECD countries.

Labour market reform, per se, isn’t a magic bullet by any means, but it is widely seen as important to improving France’s economic health, and defusing important sources of tension in the labour market and among the young. President Macron’s five decrees, comprising 36 key reform initiatives were announced last Thursday.

The key proposals would make it easier for companies to hire and to fire workers. Companies would no longer be barred from laying off people, as they are now, if their global operations are deemed profitable. There will be greater flexibility for companies and workers to agree changes in wages, hours and conditions at a company level, instead of by industry-wide bargaining. This is predicted to have a positive effect on hiring by smaller companies, which tend to do most of the hiring anyway. There will be set scales for determining compensation in the event of wrongful dismissals, instead of the current system that is notional, protracted, complex and ends up often in large settlements. Red tape will be pared back for companies with more than 50 employees, for example, the requirements to set up works councils and health and safety committees (except for example in industries such as nuclear). And short-term job contract terms will be set by sectors and industries, rather than by national law.

This shake up of France’s labour market will be disruptive if it is to be successful, but the measures have to be put into context. Most measures of labour market performance have stagnated for a decade, and the labour market remains highly segmented, with too many temporary jobs and very low chances that those in temporary work will find full time work. Since the financial crisis, France has created no net new salaried positions. Almost all the growth in employment has been among the self-employed and those engaged on temporary contracts. Last year, over 85 per cent of new hires were in temporary roles. And as suggested earlier, employment rates for older citizens have not risen as they have elsewhere in the EU or in the US and Japan.

To the extent, then, that Macron’s labour proposals are implemented effectively, the authorities will hope that more local flexibility, greater clarity about the conditions and expected costs of dismissals, and the higher relative costs for hiring on temporary contracts will help to strengthen the incentives to hire on permanent contracts, and strengthen the labour market in general.

Labour reform will constitute something of an acid test for the Macron government. If it fails, there will be little confidence that Macron’s election will really have pushed France across the reform Rubicon, and the government will be vulnerable to a revival of more visceral politics. If it is able to proceed without too much disruption, it can move on to pension reforms and perhaps even a deeper discussion about what the French want from the state vis-a-vis the private sector, and from Macron’s ideas about new Franco-German initiatives for the EU.

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