A closer look at the plentiful literature claiming that structural unemployment (in economic terms: the NAIRU or non-accelerating inflation rate of unemployment) is caused by ‘rigid’ labour market institutions reveals that the evidence is pretty weak, or even non-existent.I agree that the prescribed medicine of more flexible labor markets will not cure Europe's--and more particularly France's--economic problems. In the French case, however, I think the problem is more subtle than a simple market-oriented analysis suggests. It is not an economic problem but a political-economic problem. Labor's understandable attachment to job protections and management's understandable aversion to production disruptions both reinforce government's devotion to political stability. The upshot is universal timidity: management is reluctant to take risks necessary to maintain competitiveness if the consequent reorganization of production is likely to alarm labor even temporarily; labor, distrustful of management's motives, is unwilling to tolerate any change in the production regime; and government is only too eager to subsidize compromise that keeps both labor and management quiescent in the short run, even if the short-term compromise threatens long-term viability. The result is a vicious circle of non-adaptive behavior. The illusion of stability is purchased at the very steep price of ultimate extinction.
Indeed, in 2005 a group of economists undertook a critical analysis of the economic literature on flexible labour markets, examining all the major mainstream studies since the beginning of the nineties (Howell 2005). Their conclusion was that there were many problems with the studies under review. In particular, econometric regressions were found to be ‘non-robust’. This means that, using the same data, modest changes in the measurements of institutions, countries or the time period covered led to zero, statistically insignificant or even changed coefficients. In the case of one paper that was very influential in opening this discussion on structural unemployment and labour market institutions, results could not be replicated when using the same specification but with a data set that had been improved by the author himself (a bit similar to the recent Reinhard/Rogoff incident concerning their paper on the 90% of GDP public debt threshold). Another conclusion was that, whereas the link between unemployment and factors such as job protection, unemployment benefits and trade union density was highly questionable, positive or regulatory practices such as coordinated collective bargaining and active labour market policies were scoring much better in explaining different outcomes in unemployment.
French is fond of the phrase partenaires sociaux, the meaning of which is scarcely captured by the English "social partners." What I'm describing is a "partnership in doom," cemented by the intrinsic conservatism of French industrial relations--a conservatism masked by the occasional eruptions of "bossnapping" (as we see at the moment in Amiens) and industrial sabotage. At bottom, both management and labor abhor change and prefer the status quo even if the status quo spells doom in the face of accelerating global transformation. For too long government has abetted this conservatism of the social partners, but now that the unsustainability of the existing industrial relations regime is daily more apparent, government is beginning to panic, while populists are pushing the aversion to change into the phantasmagoric realm of nationalist retreat and complete withdrawal from global competition.