Hollande floats Nordic-inspired model as remedy for France’s broken labour code

by Emmanuel Martin Unemployment in France is at a record high. […]

by Emmanuel Martin

Unemployment in France is at a record high. Despite the creation of almost half a million subsidised jobs, the ranks of the jobless have swelled by about 1.2 million in the three years since President Francois Hollande’s election, to 6.4 million. For some time now the French public has been told the trend is about to reverse, but month after month, their hopes have been dashed.

Since Mr Hollande had promised not to seek re-election if he failed to reduce unemployment, he can no longer duck the problem. The president addressed the issue directly at a news conference in September, insisting that the excessive complexity of France’s labour code was partly to blame, and calling for its reform to improve efficiency for businesses while still guaranteeing protection for workers.

His chosen method is to shift oversight from a centralised system of state regulation towards rules negotiated between employers and unions at a local level. The inspiration is very clearly from the German and Nordic models. The assumption is that this model will lead to the low levels of unemployment enjoyed in those countries.

Will Mr Hollande’s proposals allow France to cast off its byzantine labour regulations and unleash job creation and economic growth? On paper, it is a good idea. The question hovering in the background is whether one can simply copy and paste a model that has worked elsewhere. And even if it works, labour market reform on its own may not be enough to achieve the final goal of cutting unemployment.

Good ideas

Regulatory complexity generates costs for business, and thus slows down employment. And with almost 4,000 pages, there is ample potential for complexity in the French labour code. While larger companies can afford legal experts, smaller ones cannot. Thus small businesses refrain from hiring staff, for fear of being ‘stuck’ with a potential problem employee. Such perverse incentives limit company growth and job creation.

A report submitted to the French Prime Minister Manuel Valls that will be used to prepare the reform, as well as several studies by intellectuals and think tanks critical of the current system, all agree on the need to simplify the labour code. They also stress the need to entrust regulation to employer groups and unions (known as ‘social partners’) at the local level. The idea is that these organisations have a better knowledge of local circumstances, and more incentive to negotiate rules responsibly.

Experts on the left insist that the proper place for collective bargaining is at the level of whole industries (as in Germany) and argue for a reduction in the number of officially classified business sectors. Their counterparts on the right say that individual companies are the appropriate venue. Both sides agree that if decentralised rule making is to work, a common set of core principles is needed.

The source of French labour market regulation is mainly the labour code and the country’s jurisprudence (although there are secondary sources, such as collective agreements or customary industry practices). Measures to involve employer groups and labour unions in the regulatory process through collective bargaining have been in effect for the past 30 years. The results of these talks, which are held under the auspices of the government, can now be converted into law. Such negotiations are usually conducted on a nationwide, multi-sectoral basis, though agreements at the level of particular industries or companies also exist.

Mr Hollande’s most recent proposals seem to move further down the road towards consensus-based regulation, and away from regulation by the legal code. Whether they prove successful depends upon the conditions, and in particular, on whether France is institutionally ready for the required changes.

Union culture

The German model has worked well because it is embedded in a certain institutional context. The culture of German trade unions has long been structured around the ideas of consensus and dialogue. Conversely, French union culture has been shaped by an ideology of conflict. It has strong Marxist roots, prompting it to see business and profit as necessarily entailing the dispossession of workers. Even less radical unionism, such as the Christian variety, shares a typically French technocratic mentality, viewing business as a quasi-bureaucratic centre of production.

The notion that a business is a risky, uncertain, entrepreneurial venture, in which profits are to be fought for, is quite foreign to both unions and technocrats. That obviously makes dialogue with entrepreneurs more complicated.

In Germany, the traditional empowerment of unions through collective bargaining has contributed to a culture of trust. In France, the government’s long history of managing social affairs (and so many other aspects of civil society) has pre-empted a direct, responsible dialogue between workers and bosses, creating between them a sense of distrust.

Of course, meaningful negotiations could help unions to grasp business and employers to listen better, thus re-injecting trust into the process. Well-designed incentives can sometimes change cultural traits.

False devolution

Here, paradoxically, the government may be its own worst enemy. The new model for labour market regulation could become a hybrid monster, pairing collective bargaining with government oversight and funding. This would amount to a false devolution and a continuation of the present system, undermining the project of empowerment.

As it turns out, Mr Hollande has already laid down ‘red lines’ on the minimum wage and working hours, limiting the scope of negotiation. Meanwhile, the report to Mr Valls calls for a drastic reduction of the number of industries eligible for collective bargaining – effectively ruling out a spontaneous, bottom-up negotiating process.

An approach based on the genuine trust of people at the bottom would start by focusing on individual labour contracts and collective agreements at the company level, and then let collective bargaining at higher levels emerge spontaneously. But this is not the mindset of the governmental report, which has already determined the ‘right’ level for talks.

Monopoly busting

Because France has long used a state-managed model of labour relations, while preserving a ‘monopoly’ system that prevents competition among unions, its union membership rate is ridiculously low. About 7 per cent of the national labour force is unionised, and that figure drops to less than 4 per cent in the private sector.

Organised labour’s stronghold is thus found in the public sector, where the unions have stoutly defended their privileges. In the private sector, with its low rates of membership, unions are simply not representative of the workforce. This obviously complicates the collective bargaining model. Trade unions get most of their funding from levies on businesses and taxpayers, rather than members’ dues. This does not provide much incentive for responsible partnership.

All this means any labour reform based on more union involvement is doomed to fail unless the unions are reformed as well. One constructive path would be to emulate the practice in some Nordic countries, where unions provide services to their members. This would involve the unions more in business and strengthen their financial autonomy, while at the same time encouraging a less antagonistic and politicised approach to labour issues.

The proposed institutional changes could bring confusion to the workplace if the old system is not completely dismantled. Thus, they involve an inherent risk of legal dualism and regulatory uncertainty– the exact opposite of the reform’s primary goal. This means the government’s transition strategy must be clearly thought through.

Protection’s price

There are many other reasons why it would be risky to place all hopes for reducing unemployment on this reform project. Labour law complexity is not the sole cause of joblessness, so a new regulatory model will not be a sufficient remedy. Other serious reforms are needed.

Many experts say the problem with French labour law is not just its complexity but its tendency to over-protect certain labour contracts. The cost of this is to provide inadequate protection to other, more precarious forms of labour. And in a vicious cycle, the threat of unemployment has led lawmakers to enact even more protective measures, which in turn generate higher unemployment.

So far, the public discourse has remained silent on this issue. With elections due in less than two years, no government official wants to talk about the need for labour market flexibility. The motto is ‘less complexity but no less protection,’ leaving the inescapable topic of flexibility for future negotiations. But if the unions are dominated by a conflict-oriented culture, it is hard to see how such talks can succeed, especially as they are protected from competition by new employee organisations that might be more amendable to dialogue.

Another drawback is that complex business regulations generate administrative costs. Payroll levies for social benefits are already nearly as large as the average net wage, which bloats labour costs and reduces the incentive to hire. Tax credits proposed by Mr Hollande may reduce the burden on big companies, but they are too complicated to be used by small and micro businesses. What is needed are deeper and broader tax cuts, which would require corresponding reductions in public spending.


The overriding risk is that, as with many `reforms’ in France, these latest proposals contain more buzz than substance.

One can hope against hope that the regulatory overhaul succeeds, especially if it is implemented with complementary measures. But given the structure of the French welfare state and the vested interests it has created over the years, the likelihood of such a radical scenario is very small. Even if a major shock – for example, a massive downgrade of France’s sovereign debt rating and a spike in government bond yields – triggers more drastic action, the inertia of French institutions will be sufficient to slow and eventually stop it.

Another possibility is that the new model of labour relations brings genuine improvement, but the deeper issues of protection, flexibility and excessive fiscal burdens are not dealt with. This may have a small impact on the job market, but probably won’t produce a significant cut in the unemployment rate.

Under a third scenario, the chief effect of the regulatory changes would be to create more uncertainty for businesses. Since progress on other complementary reforms would be slow, the unemployment curve will not invert.

The most probable outcome is something between scenarios 2 and 3, as some lucky industries find ways to implement the new collective bargaining system to their profit, while others do not.

In the end, the biggest winner could be Mr Hollande, who has got the jump on the ‘pro-business’ right and is obviously bidding to attract ‘liberals’ in the centre as he gears up for the presidential elections in 2017.

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Source: Geopolitical Information Service



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