French Labour Market Reform: Good Intentions, Poor Delivery

Renaud Thillaye

France has not been short of controversial discussions in the past few months, in a context dominated by the terrorist threat. A few days ago, President Hollande closed a painful chapter by dropping the project of constitutional revision that would have made it possible to strip convicted terrorists of French citizenship. Since then, however, the government’s labour market reform project has become the new hot potato. What is dubbed Loi El-Khomri – after the name of the labour minister – is a last-ditch attempt to tackle France’s structural problem with unemployment and demonstrate the government’s reforming credentials before the 2017 national elections. Unfortunately, the government has made a pretty poor start (with thousands on strike last week).

Why the reform?

The reasons why a reform is deemed necessary are several. The big picture is France’s stubbornly high unemployment rate at about 10 per cent. In fairness, French unemployment did not soar after the 2008 crash in the same proportions as other EU countries. However, France started from a solid 8% unemployment rate, a level that has been the norm since the early 1980s. In 1992 already, Francois Mitterrand famously declared: “We have tried everything against unemployment”. Since then the French political class, right or left, has kept trying, in vain, to address France’s number one problem. Subsidised jobs, reduced working time, lower taxes for employers, easier dismissals, activation policies: none of these measures has made a substantial impact. More worryingly, youth and long-term unemployment are particularly high, and labour market dualism is real: 87% of hirings are temporary contracts (2015) and, since 2000, their number has soared while those of permanent contracts have stagnated.

There are two more short-term reasons compelling Hollande to act. On the one hand, he has repeated time and again that he would not run in 2017 if he did not manage to “reverse the unemployment curve”. Yet time is running short, and the latest monthly figures have sent mixed signals at best. On the other hand, the EU has long been asking for a substantial labour market reform in France of the same calibre as Hartz IV. If he wants to keep benefiting from relative fiscal leniency and an accommodating monetary policy, Hollande needs to show some good will.

What is the reform?

The main thrust of the reform is to give more space for company-level negotiation on working time and pay in order to facilitate adjustment to new market environments. Labour legislation and the standards set at sectoral level would become less important. In other words, the bill would greatly advance internal firm flexibility – rather than modify the main parameters of French labour legislation.

In particular, firms would have the possibility to implement a lower rate of overtime pay. Today, overtime is paid at 25% more for the first 8 hours (a week) and 50% more beyond that, with a minimum of 10% in case of a branch-level agreement. In the same spirit, employers and employee representatives could negotiate company-level agreements to adjust working time and pay in order to reach new objectives (accord de développement de l’emploi). These agreements would complement a more ‘defensive’ version (accord de maintien dans l’emploi) created in 2013, which has only been available to large firms running into difficulties. If no agreement can be reached, any trade union representing more than 30% of the employees could request the organisation of a referendum within the firm.

The other main aspect of the reform is to ease dismissals. Today, employees on permanent contract can only be dismissed on economic grounds in case of bankruptcy (risk) or technological change. The El-Khomri law would broaden the scope of ‘economic dismissals’ to any case of proven ‘economic difficulties’ (such as a sustained decrease in orders, or a deterioration of the balance sheet). Moreover, financial compensation for ‘unfair’ dismissals would be more strictly regulated. In France, unfair dismissals are judged by local ad hoc tribunals bringing together representatives of employers and employees. Depending on the area, compensations vary a lot. In some areas, tribunals are known to be particularly generous with employees, and this is said to have a negative impact on hiring. The reform would create an indicative grid with the intention of limiting financial compensation.

In an effort to balance things out, the government has put forward protection measures for employees. In particular, the reform would generalise the ‘individual activity account’ (compte personnel d’activité). It would be open to anyone above 16 years of age regardless of their status, and would bring together training rights and the rights gained when working under hardship (penibilité). In future, the goal is to develop this account into an (online) one-stop-shop where people would have easy, direct access to their rights.

A late sweetener added by the government is the extension of the ‘Youth Guarantee’ from 50,000 to 200,000 young people by 2017. The guarantee offers a financial safety net and personalised coaching to any young person (under 26) who has not been in employment, training or education (NEET) for six months. It is co-funded by the EU – and the government’s announcement is conditional on obtaining an extension of the funding after 2017.

Is the reform going to be adopted?

Before the ink was dry on the project, criticism mounted from all parts in late February. The government fanned the flames, suggesting that the law could go through a vote of confidence in parliament. Most trade unions, student unions and a substantial part of the French left took to the streets on 9 March and 31 March. By mid-March, a watered-down version of the bill was presented, which removed the most controversial aspects of the bill – especially the initially envisioned cap on financial compensation for unfair dismissals.

Young people protest against the general principle of weaker protection. Trade unions are unhappy about the attempt to bypass them at branch and, through referendums, at company level. More substantially, a debate has been raging among economists. In le Monde, a spectacular clash opposed a group of centre-left economists led by Philippe Aghion (and including Nobel prize-winner Jean Tirole and former IMF chief economist Olivier Blanchard) to another group of no less prestigious names led by Thomas Piketty. The former argue that the reform goes into the right direction since giving firms more flexibility and visibility can help tackle labour market segmentation, from which young people suffer particularly. The latter denounce the illusion that weaker job protection will boost employment and they downplay the reality of segmentation. For them, the main culprit behind unemployment is the absence of growth.

Where is the evidence?

In fairness, the absence of consensus among French economists reflects rather inconclusive findings on the link between employment protection legislation (EPL) and employment. One of the most referenced papers on the topic, the OECD’s Bassanini and Duval (2006), finds no hard evidence that the stringency of the former affects the latter. Stricter EPL – such as in France and Germany, see table 1 – tends to tame job volatility, i.e. to reduce job destruction in downturns and slow down job creation in expansion – precisely what has happened after 2008. However, there is substantial evidence that this has a negative impact on labour market outsiders, especially young people. Also, the duration of unemployment tends to increase under stricter EPL.

Table 1: Strictness of employment protection legislation and unemployment rate (2013)

Source: OECD

In France, a lot of ‘outsiders’ find themselves stuck in temporary or atypical positions. This affects their income situation, their ability to move into the housing market, or simply to plan for the future. Arguably, this is precisely what the French government is trying to address – not more, not less. This was also the main thrust behind the Loi Macron a year ago: giving outsiders more opportunities by opening up a few closed professions and facilitating mobility. Therefore, when critics argue that the reform will fail to prompt any surge in employment or give a boost to French growth, they miss the point. And it should be pointed out that the government does not rely only on flexibility to give young people some prospects. Other measures are designed to improve education-to-work transition like in Germany, in particular the subsidising of apprenticeships.

A lack of vision

Crucially, the reform is most interesting for what it leaves untouched, namely the four main parameters of the French labour market: the distinction between temporary contracts (CDD) and permanent contracts (CDI); a relatively high minimum wage, including for young people; relatively generous unemployment benefits both in duration and size; lifelong job protection for civil servants. There are compelling reasons to think that changing one or two of these parameters could do more to tackle unemployment and segmentation.

From a non-French perspective, the level of controversy triggered by the seemingly modest Loi El-Khomri can sound curious. Yet it would be unfair to dismiss protests as yet another manifestation of the French confrontational political culture. It is impossible to ignore the high level of anxiety and the low-level of trust that characterise French society today. Many people, especially the young, feel that they are losing out in a highly uncertain economic environment, not to mention the cultural and identity questions brought forward by terrorist attacks.

In that respect, the main problem of the Loi El-Khomri is that it carries few positive messages, and fails to project the country into the future. The government is failing to articulate what work and careers will look like in 20 years, and how individuals will be supported towards greater professional mobility. The ‘individual activity account’ could be the beginning of an answer, but it is much too modest to represent a new paradigm. If French politicians are serious about unemployment, they should work hard putting together the pillars of an ambitious, long-term plan ahead of the next electoral campaign rather than come up with a technocratic package when their political capital is at rock bottom.