Kay Van-Petersen
Australia’s Q3 CPI figures proved positive, says Saxo Capital Markets’ global macro strategy Kay Van-Petersen, but the banks didn’t appear to be buying it.
Article / 28 May 2016 at 10:00 GMT

French fragility to the fore, PM wilts in face of protests

Managing Partner / Spotlight Group
United Kingdom
  • Strike action over labour law reforms brings France to a standstill
  • France due to host the Euro 2016 football championships in June
  • French PMopens the door to possible changes in the proposed labour law
  • In a year’s time, the unions will likely face a tougher, centre-right administration

By Stephen Pope

Why are the French labour reforms so contentious?

The irony of the strike chaos that erupted on Thursday across France is that the proposed labour reforms, similar to the flexible arrangements of the UK labour market, have been proposed by a Socialist president and government.

The labour laws are designed to simplify and introduce common sense into the jobs market. They seek to give corporate employers a wider degree of self-determination to make decisions about hiring, firing, pay, and the number of working hours. The flexibility of the labour market was to be designed around the prevailing economic conditions (as against being constrained by rigid     collective-bargaining procedures).

The Socialist government led by prime minister Manuel Valls is looking to the reforms to help lower France’s high unemployment rate of more than 10% and catalyse an economy that has shown limited signs of recovery.
France UE Create your own charts with Saxo Trader click here to learn more.
Source: INSEE

The importance of flexibility

It would be a mighty leap for a Socialist administration in France to replicate the UK labour market – which is ranked in the top three for flexibility by the Organisation of Economic Cooperation and Development – but some progress would be welcome as France is currently ranked only 53rd.

The OECD has found that there is a positive correlation between the labour market's rigidity and the deterioration of the labour market situation. This tends to offer support to the hypothesis that a combination of external price shocks and short-run real wage rigidity has negative longer-run consequences for employment.

Real labour cost flexibility can be measured by the difference between actual and warranted real labour costs although the difference is not identical with the real wage gap, i.e. the difference between the real product wage and labour productivity levels.

The OECD research has established that if one takes actual labour force participation rates, labour-augmenting technical progress, and capital stock growth into account, then in Europe it is only France that has experienced persistent increases in real labour costs in excess of warranted labour cost growth.

France's 'parkouristes' are well ahead of its policymarkers in terms of 
recognising the importance of flexibility. Photo: iStock 

The proposition

One has to applaud the French government for at least trying to introduce a new system as they have clearly taken on board the analysis of the OECD’s “Local Economic and Employment Development” programme. This rationale, known as “LEED”, has determined that more flexibility in the management of programmes is required for labour market policy to contribute fully to local strategies as against rigid national collective bargaining for economic growth and social inclusion.

A central measure of the labour reform is for companies that are of sufficient size to have union representation and for ones that may be experiencing economic difficulties or are trying to boost their market share to bypass sector or industry-wide collective agreements and negotiate company-specific arrangements with the local labour force on issues such as wage rates, overtime (the current limit is 35 hours a week), and paid leave.

If the employer and its employees cannot agree to a new deal, the staff will be allowed the final decisions via a secret ballot that would require the consent of unions to only represent 30% of the workforce.

A more direct proposal to boost competitiveness and efficiency is to allow employers to use declining economic performance as a justifiable reason for dismissal. Companies with a small workforce of 10 or less will be able to lay off staff after a one-month fall in revenue. For those with a workforce of up to 300 there will be a need to demonstrate three successive quarters of falling revenues. 

The largest companies, typically those in the CAC 40, must wait for a period of 12 months.

Unions say “non!”

Reforms such as these have lost political capital as they were rammed through without parliamentary approval. They are bitterly opposed by the hard-left CGT union, which sees them as an attempt to erode trade union power and workers’ rights. They take the view that sector-based labour deals are too pro-business.

The sad reality is that with the second round of the presidential election just one year away, these labour reforms that were initially approved by free-market economists and businesses are now being rejected by the country’s main employers’ associations. They do want to work with lightweight labour laws. This is what is now being suggested as the government has been forced by union action to drastically dilute the proposals. The unions are the paymasters of the French Socialist party and as such they will hold a left-wing governments feet to the fire any time labour reform in favour of employees is mentioned.

As a result, the latest and rushed draft of labour market reforms has abandoned several pro-business changes. One idea that was supported by many employers placed a limit or cap on the severance packages employers can be ordered to pay workers found to have been wrongfully dismissed.

The sheer size of the potential payoffs awarded by French courts had been identified as a major reason why many French companies have been reluctant to hire new staff on permanent contracts and to attempt to lay off existing employees.

Free-market economists and small-business associations are frustrated because in order to succeed and grow and thereby boost employment and GDP small and medium-sized companies need flexible working conditions. After all, it is they that are the strongest creators of new jobs.

Office workers in Paris - La Défense
French workers may prize their famed protections, but these 
are of no value if no one is hiring. Photo: iStock

Forget the euros, let’s play political football

Union-led strike action to protest against the labour law reforms gripped France on Thursday. Across the nation, nuclear power plants, oil refineries, and transport hubs were disrupted. The Compagnies Républicaines de Sécurité riot police were engaged in battles with protesters in Paris and other cities, making 77 arrests. 

(It is so frustrating to see and cars and shops being vandalised – what good does that do?)

Flights in and out of Paris, Nantes, and Toulouse were affected, and a rolling strike on a work-to-rule basis by train drivers brought further disruption to regional and commuter rail services.
RTE, the body overseeing France's national power network, said stoppages at nuclear power stations were not having an immediate effect on electricity supply but warned further disturbances could impact the management of the power network.

Approximately one third of petrol stations were out of fuel or at a critical level following several days of blockades at refineries by union activists. Five of the country's eight refineries remained at standstill or were operating at reduced capacity on Thursday.

The disruption is being led by the hard left CGT union, which has called for another day of action on June 14, four days after Euro 2016 opens. The more moderate CFDT union backs the labour reforms.

When asked if the CGT were prepared to disrupt the European Football Championships CGT Chief Philippe Martinez told the Reuters news agency:

"…the government has the time to say let's stop the clock and everything will be OK, ..."

The irony is that the French public will remember how the unions have held a Socialist president and government to ransom and made a mockery of presidential and prime ministerial power. If the opinion polls are at all accurate, Hollande will be severely punished as he will not make it to the final run-off.

That will make a straight race between the centre and far right and so the unions may find in a years’ time a more emboldened pro-business president, possibly, Alain Juppé, who with a fresh mandate who will not cave in nor water down the labour reform France so badly needs.

Labour disruption
This round of labour unrest won't be forgotten in the upcoming election. Photo: iStock

— Edited by Michael McKenna

Stephen Pope is managing partner at Spotlight Ideas. Follow Stephen or post your comment below to engage with Saxo Bank's social trading platform.


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