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Sarkozy’s insufficient labour market reforms

par Valentin Petkantchin
jeudi 10 avril 2008.

Article published exclusively on the Institut économique Molinari website.

While Sarkozy was recently praising the UK for becoming a model for France, he still has to fill a huge gap to bring the French labour market to the dynamism of the British one. The opportunity to implement true market-oriented reforms was unfortunately missed since his election last summer.

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While Sarkozy was recently praising the UK for becoming a model for France, he still has to fill a huge gap to bring the French labour market to the dynamism of the British one.

The French labour market is legendary for its overall rigidity. Beyond the existence of a relatively high minimum wage – which contributes to unemployment of non-qualified workers – and a legally established 35-hour working week, obstacles to layoffs are one of the main problems responsible for sluggishness in job creation. It is of utmost importance, if the unemployment rate was to be cut, as Nicolas Sarkozy promised it would be, that those rigidities be relaxed.

Instead, even if some legislation moved indeed toward some greater flexibility, the opportunity to implement true market-oriented reforms was unfortunately missed since Sarkozy’s election last summer.

For example, the first reform the government should have made was to get rid of the socialist 35-hour law and to get away from defining a "legal" working week. Instead, a Bill was enacted on 1 September 2007, which was limited to exempting extra-working hours of social and fiscal charges. This Bill was intended to get around the 35-hour law and to give employees incentives to work more if needed.

Even if some companies and employees find this new Bill useful, its implementation is proving to be rather complex. According to a survey by the National Association of Human Resources Managers, more than two thirds of human resources directors find the Bill a source of new problems.

Another example is the attempted removal of obstacles to layoffs. Heavy regulation in France push companies into relying on other, less restrictive arrangements such as temporary contracts or the use of interim agencies. Not surprisingly, according to the OECD, temporary jobs thus turn out to be more frequent in France – 12.4% of all jobs in 2005 – than in the US (4.2%), the UK (5.5%) or Denmark (9.9%).

Moreover, in the context of international competition, companies can easily choose to locate elsewhere. Heavy labour regulation in France thus results also in chasing out those that hire.

But instead of freeing the permanent contract model from the arbitrariness of the Labour Code, the government left unions and business lobby organisations to define a new mandatory permanent labour contract model, during a negotiation process labelled "Modernisation of the labour market."

They proposed for example – in an agreement reached in January 2008 – a new opportunity to put an end to a permanent contract by mutual decision between an employee and an employer, and a new temporary contract model.

But this new regulation – already incorporated in the new Bill project for the modernization of the labour market, presented before the French Council of Ministers on March 26, 2008 – will come, if approved, on top of all existing constraints of the Labour Code which remains fundamentally untouched.

Whilst the new opportunity to negotiate layoffs may well be an option for some big companies, small enterprises who represent an important pool of new jobs, can hardly find benefit in it. Among other things, the cost of layoffs may remain as high as previously : any employee under a permanent contract could continue to require similar compensations after sacking as before.

Willingness to reform France’s labour market and reduce unemployment means that bureaucratic obstacles to layoffs and rigidities of the Labour Code must be eliminated, allowing greater freedom of contract in labour matters and a revival in hiring.

Sarkozy’s labour market reforms clearly don’t go far enough in that regard and risk being ineffective in bringing down unemployment, as promised.

Valentin Petkantchin, Director of Research, Institut économique Molinari




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