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Macron may become a martyr as he picks apart France’s rigid labour laws

    Let’s wind the clocks back almost six months. Emmanuel Macron had just surged to victory over Marine Le Pen in the second round of the French presidential election, winning 66.1% of the vote. He was returning optimism to a country that had been the victim of several terror attacks, low economic growth, crippling rates of unemployment, and a 5 year term of the most unpopular president ever.

    Now, the picture looks quite different. Macron has faced a slump in support so sharp that after 100 days, he was more unpopular than Hollande at the same stage of his presidency.

    Like many of the presidential candidates in 2017, Macron has recognised the need for economic reform in France. Encouraging investment was high on his list of priorities during the campaign, along with achieving a reorganised and more deeply integrated EU. He also promised a Nordic style economic model, where spending cuts would be mixed with a €50bn stimulus package, while bringing the budget deficit to within the EU’s target of 3% of GDP this year.

    However, his plan to cut spending rather than increasing taxes is politically challenging. But as pointed out in a recent CPS blog, it is unlikely his fiscal plans will be successful in bringing about the economic change France needs.

    Rather, tackling the supply-side of the economy could be the answer to France’s economic problems. The president aims to reduce the unemployment rate from a staggering 10% to 7% by 2022. But his re-examination of the country’s outdated and rigid labour laws is a key factor in his plummeting popularity.

    Last month, Macron signed the first reforms which will increase flexibility around basic regulations in the labour market. For example, employers and employees will now be allowed to negotiate wages without a union member being present, and a cap (albeit a watered down cap) on unfair dismissal payouts is to be put in place. A reduction in corporation tax rates from 33% to 25% by 2022 is also planned.

    The IMF has highlighted a number of “deep rooted structural rigidities” which have hampered France’s labour market. Firstly, the complexity surrounding wage negotiation and the dismissal of workers acts as a disincentive to hire them in the first place and reduces job security. In 2016 almost 60% of French workers were employed on a temporary basis.

    The high tax wedge - the difference between the employee’s take home pay and what their employment costs the employer - and generous out of work benefits also act as a disincentive to work.

    Unfortunately for Macron, political opponents and over powerful trade unions stand in the way of his labour market liberalisation. In the past month, trade unions have taken part in several protests over the recently signed changes to France’s labour laws.

    In France, unions are so powerful that at least in theory wages can be set on an industry wide basis. Company level wage agreements cannot be less favourable to workers than those at the higher industry level. But still some unions, even more moderate ones such as the CFDT, only support company wage setting on the condition that union delegates are involved.

    Currently, elected union delegates represent all employees, union members or not, in all firms with over 50 employees. This amounts to 90% of all workers in France. Union consultations cover an unusually broad range of issues, including more trivial concerns such as the reorganisation of office furniture. As a result, LSE economists have found that some firms refuse to employ over 49 members of staff, so they don’t have to deal with a union delegate.

    Even so, the IMF estimates that major reform is needed to lower unemployment beyond 8.5%. It is vital, therefore, that Macron keeps the unions on his side now so they are not already alienated when he needs them later.

    Whilst he may not be the free-market champion we would like to see, we must understand the need for baby steps when deregulating France’s deep-rooted egalitarian economic culture. Macron’s attempt to take on the unions is a step in the right direction.

    Nevertheless, the revisions to the labour market have proved fairly unpopular amongst the general public. Although favoured by businesses, a September opinion poll found 60% of voters opposed the changes to the labour laws overall. But if he can pass these reforms, with the acceptance of the unions, the stage will be set for revisions to more delicate matters such as unemployment insurance and pensions.

    Macron’s attempts to free up the labour market are to be applauded. Reduced trade union power and increased labour market flexibility are textbook supply-side stimulating policies. But more will be needed in the future to tackle the economic problems facing France, and if his popularity continues to sink, these much needed reforms may never arrive.

    Tom Doughty is a CPS Economic Research Intern. He studied Economics with French at the University of Nottingham, and has previously worked for an international market research company in Paris. 

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