The Productive People in France Need a Frexit

June 27, 2016 by Dan Mitchell

The United Kingdom is getting a lot of attention because voters just chose to leave the European Union.
 

I think this was the smart choice. Yes, there will be some short-run economic volatility, but the long-run benefits should make it worthwhile. Sort of like chemotherapy being painful, but still being much better than the alternative of cancer.

My main argument for Brexit was that the European Union is a sinking ship. The continent is in trouble because the bureaucrats in Brussels reflexively support centralization, bureaucratization, and harmonization. And it’s in trouble because most member governments support dirigiste policies on the national level.

Consider France. The country is so statist that even some folks from the establishment media have warned that government has too much power. Heck, even some of the people at the European Commission have complained that taxes are too high.

Perhaps most miraculously, there was even a column in the New York Times last month explaining how bad government policy is killing France’s job market.

It’s obvious that the current system isn’t working. …business owners are reluctant to hire employees, because it’s so complicated and expensive to fire them when times are bad. …times are pretty bad: France has 10 percent unemployment, roughly twice the levels in Germany and Britain. For young people, it’s around 24 percent. …While many other European countries have revamped their workplace rules, France has barely budged.

The most important thing to understand is that employers are extremely reluctant to hire full-time workers because it’s nearly impossible to fire them if they don’t do a good job or if the company hits hard times. And that translates into temporary jobs combined with lots of unemployment.

The Hollande government has proposed to tinker with this system.

The new labor bill — weakened after long negotiations — wouldn’t alter the bifurcated system, in which workers either get a permanent contract called a “contrat à durée indéterminée,” known as a C.D.I., or a short-term contract that can be renewed only once or twice. Almost all new jobs have the latter.

But even though the reforms are very timid, the French are protesting.

…it isn’t just unions that oppose the bill. So do more than 60 percent of the population, who fear the bill would strip workers of protections without fixing the problem. Young people took to the streets to oppose it, demanding C.D.I.s, too. Why are the French so wedded to a failing system? …they believe that a job is a basic right — guaranteed in the preamble to their Constitution — and that making it easier to fire people is an affront to that. Without a C.D.I., you’re considered naked before the indifferent forces of capitalism. …young protesters held a banner warning that they were the “génération précaire.”

Here’s the most amazing part of the story. The protesters think that a government-protected job is a rite of passage into adulthood. They want the “right to grow up,” even though their version of adulthood involves complete blindness to economic reality.

They were agitating for the right to grow up. …getting a permanent work contract is a rite of adulthood. Without one, it’s hard to get a mortgage or car loan, or rent an apartment. Mainstream economic arguments can’t compete. “Basic facts of economic science are completely dismissed,” said Étienne Wasmer, a labor economist at Sciences Po. “People don’t see that if you let employers take risks, they’ll hire more people.” Instead, many French people view the workplace as a zero-sum battle between workers and bosses.

The obvious answer is to dramatically reduce government intervention in labor markets. But since that’s a near impossibility in France, high levels of joblessness almost surely will continue and short-term employment contracts will be the norm for those who do manage to find work.

By the way, the system doesn’t even work that well for the workers with the government-protected positions.

Many workers here have permanent contracts that make it very hard to fire them. So some companies resort to an illegal strategy: They try to make someone so miserable, he’ll quit. “What happens next is, I’ll lose my team and my staff, and therefore I’ll have nothing to do,” the man predicted. “You still have to come to work every day, but you have no idea why.” …those lucky enough to have C.D.I.s can struggle at work. In one study, workers with C.D.I.s reported more stress than those with short-term contracts, in part because they felt trapped in their jobs. After all, where else would they get another permanent contract?

No wonder so many people in France want to work for the government. That way they can get lavish pay and benefits with very little pressure to perform.
 

In any case, the net result is that the French economy is stagnant. Potentially valuable labor (one of the two factors of production) is being sidelined or misallocated.
 

Writing for Market Watch, Diana Furchtgott-Roth shares her analysis of crazy French labor law.

…reforms are vital because the French economy is stagnant. GDP growth for the latest quarter was 0.6%. Over the past decade, growth has rarely risen above 1%. The unemployment rate is over 10% and the youth unemployment is 25%. Clearly tax and regulatory reform, including more labor flexibility, are needed to encourage employers to hire. …a French court this week ruled that Société Générale rogue trader Jérôme Kerviel, who lost $5.5 billion of the bank’s assets in 2008 and almost caused its bankruptcy, had been unfairly dismissed. Société Générale was ordered to pay Kerviel $511,000 because it decided he was dismissed “without cause.” …When employers cannot fire workers, they are less likely to hire them, leading to a sclerotic labor market and high unemployment. This is what the left-wing Hollande is trying to repair. …Some view France as a worker’s paradise where the government protects workers from abusive employers. The reality is that France is a worker’s nightmare where jobs are scarce and work ethic is prohibited by law.

Ambrose Evans-Pritchard is even more negative in his column for the U.K.-based Telegraph.

An intractable economic crisis has been eating away at the legitimacy of the French governing elites for much of this decade. This has now combined with a collapse in the credibility of the government, and mounting anger… The revolt comes as Paris battles a wave of protest against labour reform, a push that has come close to rupturing the Socialist Party. The measures were rammed through by decree to avoid a vote. Scenes of guerrilla warfare with police on French streets have been a public relations disaster… Rail workers are demanding a maximum 32-hour week. Eric Dor from the IESEG School of Management in Lille says powerful vested interests have made France almost unreformable. …Dor said the labour reforms have been watered down and are a far cry from the Hartz IV laws in Germany in 2004, which made it easier to fire workers and screw down wages.

He points out that the damage of labor-market intervention is exacerbated by a wretched tax system (I’ve written that the national sport of France is taxation rather than soccer).

France’s social model is funded by punitively high taxes on labour. The unintended effect is to create a destructive ‘tax wedge’ that makes it too costly to hire new workers. It protects incumbents but penalizes outsiders, leading to a blighted banlieu culture of mass youth unemployment. There are 360 separate taxes, with 470 tax loopholes. The labour code has tripled… Public spending is 57pc of GDP, a Nordic level without Danish or Swedish levels of labour flexibility. Unemployment is still 10.2pc even at this late stage of the global cycle.

Given the various ways that government discourages employment, is anyone surprised that the French work less than any other nation in Europe? Here’s a blurb from a report in the EU Observer.

French put in the least working hours in the EU, according to the bloc’s statistical office Eurostat. Full-time workers in France clocked up 1,646 hours of labour last year. 

By the way, there’s a tiny possibility of change.

There’s an election next year and one of the candidates has a platform that sounds vaguely like he wants to be the Ronald Reagan or Margaret Thatcher of France.
Here are some of the details from a report by Reuters.

French presidential hopeful Alain Juppe, the frontrunner in opinion polls 20 years after serving as a deeply unpopular prime minister, said on Tuesday he would roll back France’s iconic 35-hour working week and scrap a wealth tax if elected next year. In the mid-1990s Juppe triggered France’s worst unrest in decades because he would not budge on pension reforms. He eventually had to drop them after weeks of strikes and protests. …”The French are being kept from working by excessive labor costs. I want to cut those costs,” Juppe told hundreds of supporters as he outlined his economic platform. …Juppe said he would raise the retirement age to 65 from 62 while cutting both taxes and state spending. Juppe said he would aim to cut public spending by 80-100 billion euros over five years and to reduce payroll taxes by 10 billion euros and corporate taxes by 11 billion euros. …Juppe also said he would cap welfare subsidies.

Amazingly, Juppe is the favorite according to the polling data.

So maybe French voters finally realize (notwithstanding the bad advice of Paul Krugman) that becoming another Greece isn’t a good idea.

P.S. My “Frexit” title simply recognizes the reality – as shown in this video – that productive people already are fleeing France. Hollande’s punitive tax policy has driven many of them to other nations. French entrepreneurs in particular have flocked to London.

P.P.S. Watch Will Smith’s reaction after being told France has a top tax rate of 75 percent.

P.P.P.S. France’s effective tax rate actually climbed to more than 100 percent, though Hollande mercifully decided that taxpayers now should never have to pay more than 80 percent of their income to government.

P.P.P.P.S. The big puzzle is why the French put up with so much statism. Polling data from both 2010 and 2013 shows strong support for smaller government, and an astounding 52 percent of French citizens said they would consider moving to the United States if they got the opportunity. So why, then, have they elected statists such as Sarkozy and Hollande?!?

P.P.P.P.P.S. In my humble opinion, the most powerful comparison is between France and Switzerland.