The French Labor Market Reform

The French government has made its first proposals to reform the labor market. Its main idea is that competitive conditions have dramatically changed and it’s impossible to have a law that can solve all the issues.

For the government a “one size fits all” law cannot exist anymore on the labor market. The main reason is that companies face now very different environments that lead to a very specific framework for each of them. Therefore it can be efficient to commit to rules at companies’ level. These specificities are globalization which can be a very different constraint from one sector to another one, technological shocks with very different speed of adjustment depending on the type of activity, regulation can be very different between firms and sectors, companies’ size from the very large company to a very small one is also an issue and specificities associated with different sectors can have an impact on companies’ behavior.

In other words, competition is not a uniform framework and companies can be submitted to very different environment depending on their location, their sector of activity, etc…. It’s not efficient to expect that a law could fit for all these types of constraints. The French government idea is to have a global law on principles and a decentralized framework that will allow commitments on wages, the level of employment, the number of worked hours notably at the company’s level or at the branch level.
That’s the spirit of the labor market reform that has been presented by the prime minister Edouard Philippe and the labor minister Muriel Penicaud. The interesting point is that it will dramatically change the balance of strength within each company as negotiation will be at companies or branches’ level. Each negotiator will take into account and internalize it his way to negotiate the company’s constraint. This means that there will be less uniformity of response from trade-unions at a global event or a global shock. Trade-unions’ s weight in companies will be lower. It will be complicated for them to have a global response that could mobilize every one of their members. It can be a dramatic change from what we currently see.

This disorganization is very close to what Adam Smith said in 1776 on the balance of strength between employers who are a limited number and have the possibility to be well organized and numerous employees in companies with very different interests due to competition and weaker organization capabilities due to this heterogeneity.

Adam Smith said that this framework can give employers a specific advantage. But, this can lead to uncertainty on employees’ side because at this stage of the reform we perceive an asymmetry.
Companies will have more capabilities to adjust working conditions to the business cycle but this can lead to more volatility on the labor market and more anxiety for employees. There is a second part in the reform. It will be focused on education in order to maintain and to increase everyone employability. In that case the possibility to rapidly find a new job will be higher. It will also allows an easier transfer of resources from weak sectors to sectors with a stronger momentum. Educated people will be able to find a job in sectors with a high momentum leading to a more reactive economy.
This step on education is essential instead the reform will remain asymmetric. The French government has to create a new framework of flexicurity à la française. If there is no convergence to this type of framework the reform efficiency could be in doubt. This part on education is also at the center of the government agenda notably through an important effort on public investment.

A very important issue in the management of this reform is the way it will be implemented. The first part of the reform related to commitments at companies level will take place before the end of this summer (September the 21st) so it can be done very quickly. The part related to education will take a lot of time. There is a need to reform the current framework on education and it will take time before the new framework converges to a efficient system. This new asymmetry can be a source of discord. The government will have to be smart to avoid social unrest due to this asymmetry.

At the end, the French labor market framework must converge to a flexicurity à la Française to be efficient. It could then leading to a lower unemployment rate and boosting productivity. This is important as in that case, the French economy could be more reactive to its environment with higher possibilities to create jobs. In this new environment, populism will no longer be an issue.

Philippe Waechter – Chief economist – Natixis Asset Management