Perverse Economic Impact of Laws Inhibiting Employment Termination: French Government “Gets It”; French Protesters Don’t

Today, some thoughts on employment policy and economics inspired by these recent developments in France:

PARIS (Reuters) – Huge crowds of students, trade unionists and left-wing politicians took to the streets across France on Saturday to press the conservative government to scrap a new law they fear will erode job security for young workers.

The protesters demanded that [Prime Minister Dominique de] Villepin withdraw a new youth job contract, known as the CPE, which lets firms fire workers under 26 without explanation in their first two years on the job.

He launched it to spur reluctant employers to take on new staff.

Reuters.com: Huge crowds march in France against youth jobs law

So, why the protests? Is there any rational economic basis for the disputed law?

Let’s start with a quick look at French employment law. Employment at will doesn’t exist there:

It is necessary in France to provide a written contract of employment to all staff of whatever grade or level. . . .

Contracts of employment are virtually always for an indefinite term and specific agreements for short limited term employment are tightly regulated . . . . [L]imited term agreements may not be renewed more than once otherwise they will be held to become indefinite term agreements.

[O]nce you have taken on an employee you may only dismiss him or her for a specific reason . . . recognised by French statute or by French case law.

The dismissal procedure on disciplinary grounds is very formalised and failure to follow the procedural steps, even where the dismissal is manifestly justified on the merits, may result in the Courts overturning the dismissal and ordering the reinstatement of the employee.

The French Law Resource: “Hiring/Firing Staff”

Clearly, although American employers feel subject to substantial legal constraints on termination, notwithstanding employment at will, those in France exceed those here:

Redundancies, or lay-offs on economic grounds, are subject to separate and complex procedural and substantive constraints particularly in the case of multiple dismissals.

There are a number of French State Agencies which have a statutory right to be advised of, and in some cases to authorise, proposed dismissals by private sector employers.

It is extremely easy and at virtually no cost for an employee to start litigation against his (ex) employer before separate Labour Courts . . . .

It is rare that . . . claims be dismissed with no award whatsoever being made against the employer.

Triplet & Associés: “French Employment Law: Dismissing Employees in France”

The new French law allows termination at will during the first two years of youth employment. The protesters see this as undermining the generous job-security provisions of French law summarized above.

Of course, it has this impact on French employment law, but is it bad for the French public and French economy?

When you’re unemployed, like many of the protesters, job security and protection against discharge are largely moot issues. French unemployment has been a stubborn problem: “France is infamous for its high chronic unemployment rate which has persisted since the 1970s”; “youth unemployment has reached 23 %” ; and overall unemployment is around 10%.

Aplia Econ Blog has a straightforward explanation of why the change in the law is a good idea: “Youth Unemployment in France”

[J]ob protection rights have some unintended consequences.

To analyze the effects of the laws, imagine yourself as a French business owner. Suppose a young, inexperienced worker applies for a position with your firm. There’s a 50 percent chance she will work hard and a 50 percent chance she will slack off. You might be less willing to take a chance on this inexperienced worker if you face high dismissal costs in the event that she’s a slacker.

In short, French laws designed to protect workers actually create a disincentive for businesses to hire young, inexperienced workers in the first place.

Some argue that this accounts for the sky-high youth unemployment rate in France, which currently stands at 23%–and even higher among immigrant populations.

timesonline.co.uk also makes the case: “Getting the sack really would help French workers; Protesting French students need an economics lesson” This article weaves the employment termination issue into an intriguing discussion of income inequality, stating “Job mobility is a more practical political goal than economic equality,” and making the key point:

It is natural that earnings become more broadly dispersed when countries grow and so economic inequality increases. We cannot take economic equality as a measure of wellbeing.

If people preferred economic equality, Cuba would find itself with floods of immigrants. Instead, Cubans and others risk their lives to get to the United States, one of the most economically unequal countries in the world.

Measures to reduce inequality can slow economic performance and reduce growth.

Thomas Sowell sees the economic issue as so simple and obvious, that he considers the protests indicative of educational failure:

Student riots in Paris remind us that education at elite academic institutions is not enough to teach either higher morals or basic economics. Not on their side of the Atlantic or on ours.

Why are students at the Sorbonne and other distinguished institutions out trashing the streets and attacking the police? Because they want privileges in the name of rights, and are too ignorant of economics to realize that those privileges cost them jobs. . .

It is elementary economics that adding to the costs, including risks, of hiring workers tends to reduce the number of workers hired. It should not be news to anyone, whether or not they have gone to a university, that raising costs usually results in fewer transactions.

The fact that such profound ignorance of basic economics and such self-indulgent emotionalism should be prevalent at elite institutions of higher education is one of the many deep-seated failures of universities on both sides of the Atlantic.

For a predictably contrary view, see the World Socialist Web Site: “France: National student protest held against government attack on young workers,”: characterizing the new law as one of “a raft of measures that are aimed at strengthening the international competitiveness of French capitalism by downgrading the social position of the working class.”

Of course it is not possible, in their view, that the working class may actually benefit, by being able to work, from improved international competitiveness of French capitalism. Where do these guys think jobs come from?

For some over-my-head economic analysis of such issues, see:

Center for Economic and Policy Research: “The Macroeconomic Roots of High European Unemployment,” disagreeing with labor market rigidity such as restrictions on termination as an explanation for stubborn unemployment:

[T]he evidence for a microeconomic explanation for this rise in unemployment, based on labor market rigidities, is weak. Little or no evidence supports the view that European labor markets are more rigid in the late 1990s than they were in the 1960s.

The alternative microeconomic explanation—that high European unemployment reflects inflexibility in the face of relative demand shocks—is not consistent with the patterns of relative employment and unemployment by skill levels. The increase in unemployment has not been concentrated among the least skilled, as this theory would predict. . .

As an alternative, this paper argues that we can best understand European unemployment as a macroeconomic phenomenon, with the impact of contractionary policies transmitted across national borders.

Labour Economics: “Temporary jobs, employment protection and labor market performance,” using way-over-my-head mathematical models to investigate the impact on unemployment of strong restrictions on termination, combined with increase use of temporary employees:

[T]heory predicts that allowing for more temporary jobs to be created while im-
posing positive firing costs fosters both job creation and job destruction, with a conse-
quently ambiguous overall impact on equilibrium unemployment.

But simulations of a calibrated version of our model for a typical European labor market nonetheless suggest that the effect on job destruction is stronger, resulting in a higher unemployment rate for economies with both stringent firing restrictions and a widespread use of fixed-duration contracts.

And how does this apply to the US?

We also have imposed increasing legal constraints on the right to terminate employment, not in terms of the type of absolute protections the French have, but certainly under various discrimination laws and exceptions to employment at will.

And we need to recognize the counterproductive negative consequences such legal restraints have on employers’ willingness to hire, and their preference for temporary employment.

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