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French Election Will Signal Nation's Commitment to Economic Reform

23 Apr 2017 4:25 pm
By Greg Ip 

French voters are in a surly mood: As they head to the polls Sunday, they stand ready to send a complete outsider -- perhaps from the far left or the far right -- to a runoff in the presidential election.

The cause of this misery isn't hard to find. France's economy is among the sickest of the advanced countries. Unemployment has been around 10% for four years and is well above the European Union average. Per capita incomes are no higher than in 2007.

Marine Le Pen, leader of the far-right National Front and one of four front-runners, lays the blame at the feet of the European Union and the euro, which she claims have made it impossible for French industry to compete with Germany's. Her solution: Leave.

Jean-Luc Melenchon, a former communist and another favorite, instead blames fiscal austerity. He too would renegotiate France's membership in the EU.

Yet France's problems long predate the euro crisis and the austerity that followed. From 1990 to 2007 France had the second weakest per capita economic growth of advanced economies according to the Organization for Economic Cooperation and Development. Only Italy's was worse.

The reasons are numerous but the most important is an overregulated and inflexible labor market that has discouraged hiring and investment, undermined productivity and left too many French workers undereducated or under-skilled.

A few statistics bear this out. While just 8% of workers are unionized, fully 90% are covered by collective agreements. The centralization of bargaining makes it almost impossible for companies to calibrate hiring to plant-level needs. It is time consuming and costly to fire a worker. Income and payroll taxes are nearly 50% of the average wage. By driving a thick wedge between what employers pay and what workers receive, that discourages work. Unemployment benefits are generous and the minimum wage high.

The result is bifurcated labor market where a large share of workers, especially the young, work on temporary contracts and receive little or no training. Innumeracy and illiteracy are both far higher than the OECD average.

These problems persist because French voters, despite their obvious hunger for change, have punished any president who sought to tackle the underlying problems. France has never had a Ronald Reagan or a Margaret Thatcher. Conservative leaders have cut taxes, privatized firms and boosted competition, but changes that affect workers are routinely met with strikes and demonstrations.

The result is that even as Germany in the early 2000s injected flexibility into its labor markets, France headed in the other direction, creating a 35-hour workweek on the flawed assumption this would spread work around and bring down unemployment. The short workweek is now nearly sacred.

Spain, Portugal and Italy also suffered from rigid labor markets but have had to reform under the pressure of the euro crisis, though Italy's efforts have stalled. France was largely spared those pressures, and indeed Nicolas Sarkozy, elected in 2007, lost his Thatcherite zeal for reform once the crisis hit.

Ironically it is the socialist incumbent François Hollande who has been boldest. Although elected on a far-left platform of higher taxes and more state intervention, he executed a U-turn. Led by his youthful economy minister, Emmanuel Macron, Hollande injected more competition into product markets such as for legal services and bus transport, then tackled the labor market with plans to decentralize bargaining and ease rules for laying off workers. The moves met a backlash within the socialist party and on the streets. The reforms were watered down, one reason that Mr. Macron quit and is now contesting the presidential election as the head of a new party.

Mr. Holland paid a steep price for the reforms. They are one reason his popularity collapsed and didn't run for a second term.

France's labor market has, at long last, begun to recover; job growth last year was relatively healthy. The reforms have shown some signs of success, such as a drop in dismissal-related job disputes. Still, the job-market recovery remains far behind Spain's, where labor market reforms were more radical (and the recession much deeper). This is partly because it's too soon -- firms often respond to increased flexibility by stepping up firing first and hiring later -- and even more because they were too timid.

A key goal of Mr. Hollande's reforms was to free firms from national and sector-wide agreements on wages, hours and employment. But employees must still generally agree to opt out and thus few such agreements occur. Large firms must generally be experiencing hardship at the global level to lay off French employees.

These rigidities not only elevate unemployment, they hold back productivity growth because it is so difficult to reallocate labor to its most productive use. "Wages are not sufficiently connected to productivity at the firm, sectoral or national level," says Philippe Martin, an economist at Sciences Po and an adviser to Mr. Macron. "France is a high wage country, and therefore has to remain a high productivity country."

Ms. Le Pen and Mr. Melenchon, though ostensibly from opposite ends of the political spectrum, are actually largely in agreement on labor issues: They think Mr. Hollande's reforms have gone too far and would scrap them. By contrast, Mr. Macron and François Fillon of the conservative Republicans would push the reforms further. French voters are thus not deciding whether their economy remains integrated with Europe, but whether it will make the changes necessary to thrive in it.

Write to Greg Ip at greg.ip@wsj.com

(END) Dow Jones Newswires

April 23, 2017 12:25 ET (16:25 GMT)

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