French Election Will Signal Nation's Commitment to Economic Reform
April 23 2017 - 12:55PM
Dow Jones News
By Greg Ip
French voters are in a surly mood: As they head to the polls
Sunday, they stand ready to send a complete outsider -- perhaps
from the far left or the far right -- to a runoff in the
presidential election.
The cause of this misery isn't hard to find. France's economy is
among the sickest of the advanced countries. Unemployment has been
around 10% for four years and is well above the European Union
average. Per capita incomes are no higher than in 2007.
Marine Le Pen, leader of the far-right National Front and one of
four front-runners, lays the blame at the feet of the European
Union and the euro, which she claims have made it impossible for
French industry to compete with Germany's. Her solution: Leave.
Jean-Luc Melenchon, a former communist and another favorite,
instead blames fiscal austerity. He too would renegotiate France's
membership in the EU.
Yet France's problems long predate the euro crisis and the
austerity that followed. From 1990 to 2007 France had the second
weakest per capita economic growth of advanced economies according
to the Organization for Economic Cooperation and Development. Only
Italy's was worse.
The reasons are numerous but the most important is an
overregulated and inflexible labor market that has discouraged
hiring and investment, undermined productivity and left too many
French workers undereducated or under-skilled.
A few statistics bear this out. While just 8% of workers are
unionized, fully 90% are covered by collective agreements. The
centralization of bargaining makes it almost impossible for
companies to calibrate hiring to plant-level needs. It is time
consuming and costly to fire a worker. Income and payroll taxes are
nearly 50% of the average wage. By driving a thick wedge between
what employers pay and what workers receive, that discourages work.
Unemployment benefits are generous and the minimum wage high.
The result is bifurcated labor market where a large share of
workers, especially the young, work on temporary contracts and
receive little or no training. Innumeracy and illiteracy are both
far higher than the OECD average.
These problems persist because French voters, despite their
obvious hunger for change, have punished any president who sought
to tackle the underlying problems. France has never had a Ronald
Reagan or a Margaret Thatcher. Conservative leaders have cut taxes,
privatized firms and boosted competition, but changes that affect
workers are routinely met with strikes and demonstrations.
The result is that even as Germany in the early 2000s injected
flexibility into its labor markets, France headed in the other
direction, creating a 35-hour workweek on the flawed assumption
this would spread work around and bring down unemployment. The
short workweek is now nearly sacred.
Spain, Portugal and Italy also suffered from rigid labor markets
but have had to reform under the pressure of the euro crisis,
though Italy's efforts have stalled. France was largely spared
those pressures, and indeed Nicolas Sarkozy, elected in 2007, lost
his Thatcherite zeal for reform once the crisis hit.
Ironically it is the socialist incumbent François Hollande who
has been boldest. Although elected on a far-left platform of higher
taxes and more state intervention, he executed a U-turn. Led by his
youthful economy minister, Emmanuel Macron, Hollande injected more
competition into product markets such as for legal services and bus
transport, then tackled the labor market with plans to decentralize
bargaining and ease rules for laying off workers. The moves met a
backlash within the socialist party and on the streets. The reforms
were watered down, one reason that Mr. Macron quit and is now
contesting the presidential election as the head of a new
party.
Mr. Holland paid a steep price for the reforms. They are one
reason his popularity collapsed and didn't run for a second
term.
France's labor market has, at long last, begun to recover; job
growth last year was relatively healthy. The reforms have shown
some signs of success, such as a drop in dismissal-related job
disputes. Still, the job-market recovery remains far behind
Spain's, where labor market reforms were more radical (and the
recession much deeper). This is partly because it's too soon --
firms often respond to increased flexibility by stepping up firing
first and hiring later -- and even more because they were too
timid.
A key goal of Mr. Hollande's reforms was to free firms from
national and sector-wide agreements on wages, hours and employment.
But employees must still generally agree to opt out and thus few
such agreements occur. Large firms must generally be experiencing
hardship at the global level to lay off French employees.
These rigidities not only elevate unemployment, they hold back
productivity growth because it is so difficult to reallocate labor
to its most productive use. "Wages are not sufficiently connected
to productivity at the firm, sectoral or national level," says
Philippe Martin, an economist at Sciences Po and an adviser to Mr.
Macron. "France is a high wage country, and therefore has to remain
a high productivity country."
Ms. Le Pen and Mr. Melenchon, though ostensibly from opposite
ends of the political spectrum, are actually largely in agreement
on labor issues: They think Mr. Hollande's reforms have gone too
far and would scrap them. By contrast, Mr. Macron and François
Fillon of the conservative Republicans would push the reforms
further. French voters are thus not deciding whether their economy
remains integrated with Europe, but whether it will make the
changes necessary to thrive in it.
Write to Greg Ip at greg.ip@wsj.com
(END) Dow Jones Newswires
April 23, 2017 12:40 ET (16:40 GMT)
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