French labour market reform is getting closer to the problem

Renaud Thillaye / Apr 2016

Demonstrators opposing the new French employment law. Photo: Wikimedia Commons


The European Commission and Berlin may eventually get what they want. With the loi El-Khomri François Hollande and the French government are throwing their remaining bits of political capital behind a reform that would introduce greater labour market flexibility. The project responds to longstanding critiques against French strict job protection and working time regime, which have been subject of EU country-specific recommendations to France for years now. In a country accustomed to high structural unemployment, the government’s instincts are right. Unfortunately, it has made a pretty poor job packaging and selling the reform.

Stuck at around 10% today, French unemployment did not soar after the 2008 crash in the same proportions as other EU countries. However, it started from a solid 8% level, which had been the norm since the early 1980s. For thirty years, the French political class, left or right, has kept trying, in vain, to address France’s number one problem. Subsidised jobs, reduction in working time, lower taxes for employers, easier dismissals, activation policies: none of these measures have made a substantial impact. More worryingly, youth and long-term unemployment are particularly high, and labour market dualism is real: 87% of hirings are temporary contracts (2015), and since 2000, their number has soared while the number of permanent contracts have stagnated.

The main thrust of the reform is to give more space for firm-level negotiation in order to facilitate adjustment to new market environments. Labour legislation and the standards set at branch level would become less important. In other words, the bill would greatly advance internal firm flexibility - rather than modify the main parameters of French labour legislation. In particular, firms would have the possibility to implement a lower rate of overtime pay. In the same spirit, employers and employee representatives could negotiate firm-level agreements to adjust working time and pay in order to reach new objectives. If no agreement can be reached, any trade union representing more than 30% of the employees could request the organisation of a referendum within the firm.

The other main objective is to encourage hiring by easing dismissals. Today, employees under permanent contract can only be dismissed on economic grounds in case of bankruptcy (risk) or technological change. The El-Khomri law would broaden the scope of ‘economic dismissals’ to any case of proven ‘economic difficulties’. Moreover, financial compensation for 'unfair' dismissals would be more strictly regulated. In France, unfair dismissals are judged by local ad hoc tribunals bringing together representatives of employers and employees. Depending on the area, compensations vary a lot, and this can have detrimental effects locally. The reform would create an indicative grid with the intention of limiting financial compensation.

In an effort to balance things out, the government advances protection measures for employees. In particular, the reform would generalise the ‘individual activity account’ (compte personnel d'activité). It would be open to anyone above 16 y. o. regardless of their status, and would bring together training rights and the rights gained when working under hardship (pénibilité). In the future, the ambition is to develop this account into an online single stop-shop where people would have easy, direct access to their rights. A series of ‘sweetening pills’ have also been added by the government in the face of student and young people protests. In particular, the French youth guarantee – partially financed by the EU – will be extended from 50,000 to 200,000 young people by 2017.

Like on similar past occasions, the reform project has triggered a wave of strikes and protests, and the government has been forced to present a watered-down version of the bill. One year before the presidential and parliamentary elections, the Socialist majority is tempted to extinguish the flames. It does not help either that the expert community is divided on the benefits of the reform. In le Monde, a spectacular clash opposed a group of centre-left economists led by Philippe Aghion, Nobel price award Jean Tirole and former IMF chief economist Olivier Blanchard to another group of no less prestigious names led by Thomas Piketty. The former argue that the reform goes into the right direction since giving firms more flexibility and visibility can help tackle labour market segmentation. The latter denounce the illusion that weaker job protection will boost employment, especially in a context of low growth.

Both sides have a point. Academic and OECD studies on the link between employment protection legislation (EPL) and employment show that stricter EPL tends to tame job volatility but has little effect on the overall volume of employment. Nevertheless, there is evidence that it has a negative impact on labour market outsiders, especially young people and the long-term unemployed. The insider-outsider divide is precisely what the French government is trying to address – not more, not less. Crucially, the reform is perhaps the most interesting for what it leaves untouched, namely the four main parameters of the French labour market: the distinction between temporary contracts (CDD) and permanent contracts (CDI); a relatively high minimum wage, including for young people; generous unemployment benefits both in duration and size, compared with other countries; lifelong job guarantee for civil servants.

Arguably, the main problem of the loi El-Khomri is that it carries few positive messages. The French government has failed to articulate what work and careers will look like in the future, and how individuals should be supported towards greater professional mobility. The ‘individual activity account’ could be the beginning of an answer, but it is much too modest to represent a new flexicurity paradigm. If French politicians are serious about unemployment, they should work hard putting together the pillars of an ambitious, long-term plan ahead of the next electoral campaign rather than come up with a technocratic package when their political capital is at rock bottom.


Renaud Thillaye

Renaud Thillaye

April 2016

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