Thursday, May 10, 2012

Incentives in France

An article from Bloomberg points to an interesting situation in the French economy:
The country has 2.4 times as many companies with 49 employees as with 50.
That's a significant difference. Why would a company not want to hire an additional person, if it needed the help? Because that's what this stat indicates, that there's some sort of barrier to overcome.

Unsurprisingly, the barrier is the French government and it's labor laws:
What difference does one employee make? Plenty, according to the French labor code. Once a company has at least 50 employees inside France, management must create three worker councils, introduce profit sharing, and submit restructuring plans to the councils if the company decides to fire workers for economic reasons.
Thus, the incentives created by the labor code actually serve to restrict hiring, to put an artificial limit on the size of companies, in terms of number of employees. To overcome this obstacle to growth, many business owners in France spin off new companies, rather than simply growing the size of their primary company. When growth cannot be spun off--like when it's all a matter of increasing production--companies will often simply establish new plants outside of France, thus avoiding the 50 employee threshold, which applies only to employees within France, proper.

The issue of eliminating workers--for companies with 50 or more employees--becomes especially tricky. The code mandates that workers' councils can go to court--which they often do--to prevent any kind of downsizing. An example from the article:
Software maker Viveo Group, an arm of Geneva-based Temenos Group, began the required talks with the workers’ council in February 2010 because it wanted to cut about a third of its 180-member staff, according to court records. Viveo offered employees a voluntary departure plan in June of that year as the council dragged its feet on evaluating the earlier proposal, court records show. The workers’ council then went to court to block the cuts. It won a ruling against the original plan in January 2011 on the grounds that Viveo was forecasting an 18 percent increase in sales, meaning its future didn’t depend on the layoffs. France’s highest appeals court is reviewing the decision and is expected to rule on May 3...If the decision is upheld, Viveo will have to take back the workers and hand over two and a half years in back pay, she says.
I can't help but think it's often more practical--for a company that wants to cut back it's labor force--to simply go bankrupt and start over again from scratch.


Much has been made of the supposed failure of austerity measures in France, with regard to turning around the French economy. Sarkozy's defeat has been attributed to such by the many Krugman fan-boys in the media. But note this piece from Michael Tanner at NRO and what he says about the French economy:
In France, for example, the so-called austerity largely consisted of raising taxes... 
True, there were some entitlement reforms and spending reductions. But they haven’t actually occurred yet. For example, France will raise its retirement age from 60 to 62, but not until 2017! A cap would also be put on government health-care spending, starting next year. It is a little hard, therefore, to discern whether it is budget cuts that may or may not happen some day in the future, rather than tax increases today, that have slowed French economic growth.
What's missing are large scale reforms to a restrictive labor code, a code that we can see creates the wrong kinds of incentives for economic growth.

Germany, of course, is not catching the same kind of flak as France, the UK, and other EU nations, since it's economy is doing much better. But  as I noted previously, this is because Germany had already managed to address some of the issues in its own labor laws that created the wrong kinds of incentives, as indicated in this article from the WSJ:
Throughout the 1990s and the first years of the last decade, Germany was Europe's hobbled giant, with consistently subpar growth rates and unemployment that in 2005 hit 11.3%, nearly at the top of the OECD chart. 
Then-Chancellor Gerhard Schröder, a Social Democrat, surprised the world, to say nothing of his own voters, by pushing through the labor-market reforms that paved the way for the current relative prosperity. The changes cut welfare benefits and gave employers more flexibility in reaching agreement with their employees on working time and pay. 
The Schröder government, and later the coalition under Angela Merkel, also cut federal corporate income taxes to 15% from 45% in 1998. Include state taxes, and the effective corporate rate today is close to 30%, down from 50% or more in the 1990s. These reforms made Germany more competitive, attracted investment and jobs, and paved the way for the country's economic resurgence and an unemployment rate currently at 5.7%.
Note the dichotomy: France raised various taxes and failed to make any meaningful reforms in the labor market, while Germany cut corporate taxes and addressed problems in its labor market.

To be fair to the Sarkozy government, however, there was no way it could have pushed through meaningful  reforms in the labor market. But now the question becomes: what will the new--more socialist--French government do? If it follows the lead of the austerity critics, it will probably increase spending, increase taxes on the wealthy (even more), and not reform much of anything. Wonder how that will turn out...

Cheers, all.

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