By Greg Ip
French voters are in a surly mood, and who can blame them?
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 who in
unofficial results finished second in the first round of
presidential voting on Sunday and was poised to proceed to the
final round on May 7, blames the European Union and the euro, which
she claims have made it impossible for French industry to compete
with Germany's while robbing France of fiscal independence. Her
solution: Leave.
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. This is the story
emphasized by Emmanuel Macron, leader of the center-left upstart
party En Marche and a defender of the EU and the euro. He was
looking like the first-place finisher on Sunday and thus lining up
to face Ms. Le Pen in the second round.
A few statistics illustrate the challenge. While 8% of French
workers are unionized, 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.
These problems persist because French voters, despite their
hunger for change, have punished any president who sought to fix
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 a 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.
Even as Germany in the early 2000s injected flexibility into its
labor markets, France headed in the other direction. It created a
35-hour workweek on the flawed assumption the move 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 change 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 overhauls once the crisis hit.
Ironically, it is the socialist incumbent François Hollande who
has been boldest in tackling the status quo. Led by Mr. Macron,
then his economy minister, Mr. Hollande injected more competition
into product markets, including legal services and bus transport,
then tackled the labor market with plans to decentralize bargaining
and rules for layoffs.
The moves met a backlash within the socialist party and on the
streets. The measures were watered down, yet even so they cost Mr.
Hollande so much support that he declined to run for a second
term.
France's labor market has, at long last, begun to recover; job
growth last year was relatively healthy. The overhauls have shown
signs of success, such as a drop in dismissal-related job
disputes.
Still, the recovery remains far behind Spain's, where
labor-market overhauls 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."
While labor-market rules didn't attract the attention EU
membership and terrorism did during the election, they define the
candidates almost as much. The early results suggest the public
remains deeply divided. Roughly as many voted for Mr. Macron and
third-place finisher François Fillon of the conservative
Republicans, both of whom would have expanded the overhauls, as
voted for Ms. Le Pen and the former communist Jean-Luc Mélenchon,
who would scrap them.
Thus, on May 7, voters won't just decide if France remains
integrated with Europe, but also 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 20:18 ET (00:18 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.