Friday, February 19, 2016

Labor Code Reform

Labor minister Myriam El Khomri will present a preliminary draft of a labor code reform bill to the Council of Ministers on March 9. This is touted as "the last major reform" of Hollande's presidency. Since the previous major reforms have had little evident effect on the economy, this one will have its work cut out for it if the results are to benefit the current president rather than his replacement. Yet by its very nature, reform of the labor code, even if well conceived, is unlikely to produce results in the short term. Hence Hollande is likely to suffer politically from this bill, which will offend several constituencies whose support he would like to win back, without benefiting from any economic uptick. With such a calculus, one has to assume that he is proceeding with this reform because he believes in it. The question is, Should he?

In this era of austerity and welfare state retrenchment, the willingness to undertake "labor market reform"--which usually means some combination of wage restraint, weakened job protections, and job retraining programs for those laid off--derives equally from a certain kind of economic analysis and a certain kind of political analysis. The economic analysis sees firms in intense competition in a global marketplace where price is the crucial determinant of market share. The political analysis sees social democratic parties as supported by a broad coalition in which workers no longer dominate, so it is politically feasible to adopt measures that appear to weaken the bargaining power of workers provided that one can make the case that the end result will be increased employment and hence greater overall economic prosperity coupled with consumer benefits in the form of lower prices (or at least slower inflation). Social democrats who embrace this analysis like to think of themselves as "modern," that is, prepared to adapt to the world as it is. They stigmatize their opponents for clinging to shopworn nostrums that in the long run will reduce competitiveness and undermine prosperity.

So what is in the El Khomri bill? We find the usual mix of policies with the customary timidity of the Hollande/Valls/Macron era. This is not a Frenchified Hartz IV agreement, nor could it be, since in France there is no trust between employers and unions, as the howls of protest from the unions have already made clear. Wage restraint is to be effected through branch-by-branch accords on the level of supplementary pay for overtime hours (with overtime counted as hours above 35 per week). Firms are to be granted greater flexibility in the apportionment of working hours, with 12-hour days and 60-hour works to be negotiated in "special circumstances." Rules on layoffs are to be relaxed, and severance packages to workers laid off because of a firm's "growth-related strategy" are to be limited.

It would be good to have a detailed analysis of the way in which all these measures are intended to work together to cut unit labor costs and thus increase market and spur growth in specific industries. I doubt that such an analysis exists, and I further doubt that it would be very convincing if it did exist. There is already an extensive literature on France's diminished competitive stature, and it points to many factors other than unit labor costs. Flexibility in employment and scheduling is no doubt an advantage to firms in many industries, but it should be incumbent on firms benefiting from such advantages to demonstrate how they plan to take advantage of them. Given the failure of firms to increase hiring in return for concessions granted to them under a previous round of reforms (notably reduced payroll taxes), it is no wonder that trust is absent. Yet the government, while occasionally protesting that prior lack of response, seems to have few qualms about being taken to the cleaners once again. It is therefore hard to avoid the conclusion that the strategy behind the reform has not been clearly thought through, much less explained to the public at large. The economic rationale is weak, the political rationale weaker. That no one is surprised by this double weakness is a measure of how low expectations of government have fallen in the Hollande era.